1. The U.S. three-month interest rate (unannualized) is 1%. The Canadian three-month interest rate (unannualized) is 4%. Interest rate parity exists. The expected inflation over this period is 5% in the U.S. and 3% in Canada. A call option with a three-month expiration date on Canadian dollars is available for a premium of $.02 and a strike price of $.63. The spot rate of the Canadian dollar is $.65. Assume that you believe in purchasing power parity. What is the premium on a future contract?

(a) 1.94%

(b) -1.94%

(c) 2%

(d) -2%

2. Refer to the question no 1. What is the futures rate?

(a) $0.6630

(b) $0.6379

(c) 0.6370

(d) $0.6621

3. Refer to the question no 1. Determine the dollar amount of your profit or loss from buying a call option contract specifying C$100,000. Choose the closest answer

(a) $1320

(b) $1260

(c) Loss 1739

(d) none of the above

(e) Other ________

4. Determine the profit or loss from buying a C$100,000 futures contract. Choose the closest answer

(a) 3155

(b) 3200

(c) 3150

(d) 3130