1.Hagi Stoichkov works in the currency-trading unit of La Caxia Bank in Barcelona, Spain. Contrary to most forecasters, he believes that the Australian dollar (A$) will depreciate versus the U.S. dollar over the coming 30 days although the Federal Reserves is likely to reduce interest rates in the U.S. The current spot exchange rate is $0.7000/A$.

Hagi may choose between the following options on the Australian dollar (A$):

Option Strike Price Premium

Call on A$ $0.7250/A$ $0.0075/A$

Put on A$ $0.7250/A$ $0.0025/A$

a)Should Hagi purchase call option on the Australian dollar or put option on the Australian dollar? Explain.

b)What is Hagi's net profit per unit of Australian dollar if the spot exchange rate at the end of the 30 days is $0.6900/A$?