Suppose that you (i.e., company XYZ) are a US-based importer of goods from Canada. You expect the value of the Canada dollar to increase against the US dollar over the next 6 months. You will be making payment on a shipment of imported goods (CAD100,000) in 6 months and want to hedge your currency exposure. The US risk-free rate is 5% and the Canada risk-free rate is 4% per year. The current spot rate is $1.25/CAD, and the 6-month forward rate is $1.3/CAD. You can also buy a 6-month option on Canadian dollars at the strike price of $1.4 /CAD for a premium of $0.10/CAD.

At what 6-month forward rate: $_____ /CAD will XYZ be indifferent between the forward hedge and MMH? Please leave 4 decimal points for your answer.

If XYZ wants to hedge the transaction exposure using option hedge, XYZ should ______________.

buy a put option

sell a put option

buy a call option

sell a call option

If XYZ hedges the exposure using an option hedge, total option premium: $____ will be paid today. The option premium will grow to $ ____ in six months at the US interest rate. In six months, if the spot price is $1.3 per CAD, the option is ____ (in/out) of the money. So, XYZ will buy 100,000 CAD at the price of $____ per CAD, which equals to a total cost of $ _____. After the option premium, the total (net) dollar costs in six month is $_____ .