An Australian company is planning to sell 1 000 US-based shares to a US company. The two companies enter into a forward contract to sell the shares for some US$ amount F in one months time. To ensure it can get a reasonable exchange rate for the payment in US$, the Australia company also enters into a short forward contract to sell the US$ currency F at some forward rate k. The current price of one share is S(0) = US$10 and the current exchange rate is X(0) = 1.25 (i.e., US$1 buys AU$1.25). The current Australian return is Rd = 1.030 over one month and the current US return is Rf = 1.035 over one month.

(a) Consider the forward contract with shares as the underlying asset. According to the one-step binomial model, what is a fair forward price F (in US$) for the 1 000 shares?

(b) Consider the forward contract with US$ as the underlying asset. According to the one-step binomial model, what is a fair value for the forward rate k?

(c) In AU$, what payoff will the Australian company receive after both forward contracts are completed?