4) a) Assume that capital markets are competitive and that the international Fisher hypothesis holds

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4) a) Assume that capital markets are competitive and that the international Fisher hypothesis holds. The one-year interest rate is approximately 1% in the USA and 7% in Brazil. If the expected inflation rate is 2.5% in the USA, what is the expected inflation rate in Brazil?

b.        A firm wants to use an option to hedge 2,000,000 Euros in receivables. The premium paid is US$0.02/Euro and the exercise price is US1.25/Euro. If the option is exercised, what is the total dollar amount received after accounting for the premium paid? (Ignore all other transaction costs and the time value of the money for the premium paid.) (6 points)