You are planning to go to England in 3 months time to inspect and report upon a new agricultural discovery. You expect to be billed for a total of GBP20,000 for meals, accommodation and fares during your stay.

You note that today the spot exchange rate is AUD1.6000/GBP and the 3 months forward rate is AUD1.6500/GBP. Today, this forward rate is also your expected spot exchange rate in 3 months time. Today, you can also buy a 3 months call option on the GBP with an exercise price of AUD1.6800/GBP for a premium of AUD0.06 per GBP. The 3 month interest rate is 4 per cent per annum in Australia and 2.4% per annum in England.

1.Calculate your expected AUD cost of buying GBP20,000 if you choose to hedge by a call option on the GBP.

Give your answer to the nearest dollar.

2.Calculate the future AUD cost of meeting this GBP obligation if you decide to hedge using a forward contract.

Give your answer to the nearest dollar.

3.At what future spot exchange rate would you be indifferent between the forward and the call option market hedges?

Give your answer to 4 decimal places.