IRP, PPP, and Speculating in CurrencyDerivatives.
The U.S. three-month interest rate (unannualized) is 2%. TheCanadian three-month interest rate (unannualized) is 3%. Assumeinterest rate parity exists. The expected inflation over thisperiod is 5% in the U.S. and 3% in Canada. A call option with athree-month expiration date on Canadian dollars is available for apremium of $.03 and a strike price of $.58. The spot rate of theCanadian dollar is $.60. Assume that you believe in purchasingpower parity.
Determine the dollar amount of your profit or loss from buying acall option contract specifying $90,000 Canadian dollars.
The expected change in the Canadian dollar’s spot rate is__________________
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