IRP, PPP, and Speculation The U.S. 3-month interest rate (unannualized) is 1 percent. The Canadian 3-month interest rate (unannualized) is 4 percent. Interest rate parity exists. The expected inflation over this period is 5 percent in the United States and 2 percent in Canada. A call option with a 3-month expiration date on Canadian dollars is available for a premium of $.02 and a strike price of $.64. The spot rate of the Canadian dollar is $.65. Assume that you believe in purchasing power parity.
a. Determine the dollar amount of your profit or loss from buying a call option contract specifying C$100,000
b. Determine the dollar amount of your profit or loss from buying a futures contract specifying C$100,000.