An Australian cattle importer has bought machinery valued in USD2,000,000 and will pay for the items in
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Question:
a) If one Australian dollar is currently buying 0.76 USD, the Australian interest rate is 5%, while the American interest rate is 3%, what is the forward rate in the case of this Australian importer using USD as the base currency?
b) What is the forward margin in this situation?
c) In the case this importer could buy a foreign currency call option with a strike exchange rate E(AUD/USD) = 1.30 and a premium of 2.0% of the AUD amount. Which would be the effective exchange rate if in 120 days the exchange rate is S1(AUD/USD) = 1.35?
d) Present a graph of the hedge position for the importer holding this foreign currency call option.
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