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.

The expected cost of payables would be the same because the one$-$year interest rates in Canada and the United States are equal.

The one$-$year forward contract on Canadian dollars would be cheaper as the forward rate is the same as exercise price and the forward contract does not require an option premium.

The one$-$year at$-$the$-$money call option contract on Canadian dollars would be cheaper as the future spot rate is expected to be lower than the forward rate.