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IRP, PPP, and speculating in currency deriva- tives. The UK three-month interest rate (unannual- ized) is 1%. The Canadian three-month interest rate (unannualized) is 4%. Interest rate parity exists. The expected inflation over this period is 5% in the United Kingdom and 2% in Canada. A call option with a three-month expiration date on Canadian dollars is available for a premium of £0.02 and a strike price of £0.44. The spot rate of the Canadian dollar is £0.45. Assume that you believe in purchasing power parity.
a. Determine the pound amount of your profit or loss from buying a call option contract specifying C$100 000.
b. Determine the pound amount of your profit or loss from buying a futures contract specifying C$100 000.
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