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.

If XYZ wants to hedge the transaction exposure using forward, XYZ should enter a ________ position in a forward contract of CAD 100,000 due in six months.

long

short

If XYZ enters a forward contract today, the guaranteed dollar cost for this CAD obligation today (not in six months) should be $ _____. (please leave two decimal points for your answer. Example: 123.23)

In six months, if the spot exchange rate turns to be $1.4/CAD. XYZ will be _______ using forward hedge compared with unhedged position.

better-off

worse-off

indifferent

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

borrow PV of CAD and buy USD today, and deposit USD in the bank and sit on it.

buy PV of CAD today using USD, and deposit CAD in the bank and sit on it.