You believe that IRP presently exists. The nominal annual interest rate in Peru is 5 percent and in Canada is 3 percent. You expect that annual inflation will be about 3 percent in Peru and 2 percent in Canada. The spot rate of the Peruvian Sol PEN/CAD 0.4.Put options on Soles are available with a one year expiration date, an exercise price of PEN/CAD 0.45, and a premium of CAD 0.07 per unit.

You will receive 1 million Peruvian Soles in one year. Use four (4) digits for your PEN/CAD exchange rate calculations.

a)Determine the expected amount of Canadian Dollars that you will receive if you use a forward contract hedge. (1.5 marks)

b)Determine the expected amount of Canadian Dollars you will receive if you do not hedge and believe in purchasing power parity. (1.5 marks)

c)Determine the amount of Canadian dollars that you will expect to receive if you use a currency put option hedge. Account for the premium you would pay on the put option. (2 marks)