(4 Points) The U.S. three-month interest rate (unannualized) is 2%. The Canadian three-month interest rate (unannualized) is 5%. A put option with a three-month expiration date on Canadian dollars is available for a premium of $0.04 and a strike price of $0.70. The spot rate of the Canadian dollar is $0.74. Assume that you believe in International Fisher Effect (IFE).

Forecast the dollar amount of your profit or loss from buying a put option contract specifying C$100,000. (2 points)

Forecast the USD received by A&M company which uses the put option to hedge against its 3-month receivables of C$ 100,000. (2 points)

ANS: Please label a/b in your response to the two sub-questions respectively.