Question
You plan to buy a car in three months in USD. The price for the car will be USD20,000. The spot exchange rate is CAD1.335/USD,
You plan to buy a car in three months in USD. The price for the car will be USD20,000. The spot exchange rate is CAD1.335/USD, and the six-month forward rate is CAD1.35/USD. You can also buy the six-month call option on USD with an exercise price of CAD1.34/USD for the premium of CAD0.04 per USD. The six-month interest rate is 12% per annum in the United States and 6% per annum in Canada. At what future spot exchange rate will you be indifferent between the forward and option market hedges?
Multiple Choice
a. 1.3500 CAD per USD.
b. 1.3076 CAD per USD.
c. The rate doesn't matter since you are committed to fulfill the forward contract.
d. 1.3100 CAD per USD.
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