A portfolio manager is interested in constructing a new portfolio in the US market in May 2020. He plans to hold the portfolio for one year. On 16 May 2020, he raises 3,000,000 Canadian dollars (CAD) and converted to 2,485,254.159 USD at the spot exchange rate 1.20712 CAD per USD. In the meantime, he invests in the US equity market using such US dollars. He estimates that the expected return of the investment in the US market is 12.1% based on past data. In May 2021, the manager convert his investment in the US market back to CAD. In order to hedge unfavorable movement of the USD/CAD exchange rates, the manager asks you to help him manage the currency risk.

a) Look at the following table. For each of the futures and forward contracts, calculate the implied continuously compounded interest rate differentials (USD risk-free rate minus CAD risk-free rate, per annum)

Table showing the prices of CAD/USD futures contracts and USD/CAD forward exchange rates for different maturities on 16 May 2020:

CAD/USD Futures		USD/CAD Forwards
Contract Month	Price	Term	Rate
Jun '20	0.82928	1M	1.20710
July '20	0.82979	2M	1.20636
Aug '20	0.83056	3M	1.20512
Nov '20	0.83135	6M	1.20429
Feb '21	0.83194	9M	1.20339
May '21	0.83212	12M	1.20287

b) According to the table above, is the Canadian Dollar trading at a forward premium or a discount against US Dollar?

c) To hedge using the CAD/USD May '21 futures contract, should the company take a long or a short position? What would be the number of contracts needed?