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Estimate the dollar cash flows received as a result

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Indiana Company expects to receive 5 million Australian dollars in one year from exports, and it wants to consider hedging its exchange rate risk. The spot rate of Australian dollar as of today is US$0.79. Interest rate parity exists. Indiana Co. uses the forward rate as a predictor of the future spot rate. The annual interest rate in the United States is 8 per cent versus an annual interest rate of 5 per cent in Australia. Put options on Australian dollars are available with an exercise price of US$0.80, an expiration date of one year from today, and a premium of US$.06 per unit. Estimate the US dollar cash flows that Indiana Co. will receive as a result of using each of the following strategies. It can use any one of the following strategies to deal with the exchange rate risk. Estimate the dollar cash flows received as a result of using the options market hedging strategy.

Reference no: EM132497801

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