Assume interest rate parity exists. Today, the 1-year interest rate in Canada is the same as the 1-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 1 year. It needs to purchase Canadian dollars in 1 year. Will the expected cost of its payables be lower if it hedges its payables with a 1-year forward contract on Canadian dollars or a 1-year at-the-money call option contract on Canadian dollars? Explain.
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