Suppose that in Problem 23.15, the 6-month forward rate is also 1.50 and the 6 -month dollar risk-free interest rate is \(5 \%\) per annum. Suppose further that the 6 -month dollar rate of interest at which the counterparty can borrow is \(5.5 \%\) per annum. Estimate the present value of the cost of defaults assuming that defaults can occur either at the 6 -month point or at the 1-year point? (If a default occurs at the 6-month point, the company's potential loss is the market value of the contract.)

Data from Problem 23.15

A company enters into a 1-year forward contract to sell \(\$ 100\) for AUD150. The contract is initially at the money. In other words, the forward exchange rate is 1.50 . The 1 -year dollar risk-free rate of interest is \(5 \%\) per annum. The 1 -year dollar rate of interest at which the counterparty can borrow is \(6 \%\) per annum. The exchange rate volatility is \(12 \%\) per annum. Estimate the present value of the cost of defaults on the contract. Assume that defaults are recognized only at the end of the life of the contract.