Question: Please show all your work. 1. (25 points) You work for NY Currency Funds in NY. For you to establish your position on S2 after

Please show all your work. 1. (25 points) You work for

Please show all your work.

1. (25 points) You work for NY Currency Funds in NY. For you to establish your position on S2 after one year, assume that purchasing power parity (PPP) holds for the Canadian dollar to US dollar exchange rate for this operation. The current spot exchange rate is $0.6850/C$. But the Canadian inflation rate is expected to remain at a relatively high rate of 7.0% per annum compared to the U.S. dollar inflation rate of 3.0% per annum. You may choose between the following options on the Canadian dollar for one year: Option Strike price Premium Put on CS $0.7200 $0.008/CS Call on C$ $0.7200 |$0.035/CS a. Should you buy a put on Canadian dollars or a call on Canadian dollars? b. Using your answer to a, what is your breakeven price? c. Using your answer to a, what are your gross profit and net profit (including the premium) on your position for S2. d. Using your answer to c, what is your net profit (including the premium) if you have $1,000,000 to buy the option? What is the Return on Investment (ROI, pa)

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