Hedging with Forward versus Option Contracts Assume interest rate parity exists. Today the one-year interest rate in Canada is the same as the one-year interest rate in the United States. Utah Co. uses the forward rate to forecast the future spot rate of the Canadian dollar that will exist in one year. It needs to purchase Canadian dollars in one year. Will the expected cost of its payables be lower if it hedges its payables with a one-year forward contract on Canadian dollars or a one-year at-the-money call option contract on Canadian dollars? Explain.
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