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Question 2 (10 Marks) (a) You have just arrived back from Canada after a very successful business trip. You have managed to sell the designs
Question 2 (10 Marks) (a) You have just arrived back from Canada after a very successful business trip. You have managed to sell the designs to a new invention and you will be are paid in 9 months time. You expect to receive a total of CAD 100,000. You note that today the spot exchange rate is AUD 1.15/CAD and the 9 months forward rate is AUD1.17/CAD. Today, this forward rate is also your expected spot exchange rate in 9 months time. Today, you can also buy a 9 months put option on the CAD with an exercise price of AUD1.1600/CAD for a premium of AUDO.09 per CAD. The 9 month interest rate is 4 % per annum in Australia and 6% per annum in Canada. REQUIRED: (i) Calculate the expected AUD premium of selling CAD 100,000 if you choose to hedge by a put option on the CAD. [2 Marks.] Give your answer to the nearest dollar. $ (ii) Calculate the future AUD receipt if you decide to hedge using a forward contract. [2 Marks.] Give your answer to the nearest dollar. $ (iii) Based on the concept of Interest Rate Parity, what should the forward rate be? [2 Marks.] Give your answer to 4 decimal places. AUD/CAD
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