Suppose the UK steel producer Adam is trying to export 10,000 worth of steel to the US car manufacturer Eric in 3 months, which is used as a raw material to produce US cars. Now the exchange rate is 1/$. This UK steel producer Adam wants to hedge against a possible appreciation of in 3 months. Therefore, Adam bought a USD/GBP put option maturing in 3 months paying a 50 option premium. During this 3 months period the exchange rate can fluctuate between 0.98/$ and 1.05/$. The interest rate in the US is expected to be consistently 3% throughout the entire 3 months period.

(A) What is the minimum and maximum profits that Adam can earn as this option owner? (Answer in terms of ). Show all your work. [20%]

(B) According to the interest parity condition, what can be inferred (i.e., what is the actual % figure) about the UK interest rate over the 3 months period if Adam is able to make the maximum profit from his option? Show all your work. [5%]