Strategic Use of Forward Contracts for Currency Hedging

XYZ Corporation is a multinational company that exports goods from the United States to Europe. The company's management is concerned about potential fluctuations in the USD/EUR exchange rate, which could adversely affect the profit margins of their contracts. As a risk management strategy, they are considering using forward contracts to hedge against currency risk. Recently, the company has been presented with two options: a six-month forward contract and a 12-month forward contract.

Meanwhile, the company's CFO is also exploring the implications of changes in interest rates that can affect the pricing of these contracts. Currently, the annual risk-free interest rates are 2% in the U.S. and 4% in the Eurozone.

Discuss the advantages and disadvantages of using forward contracts as a hedging mechanism for XYZ Corporation. In your response, analyze the impact of the choice of forward contract duration on the risk profile and hedging effectiveness. Include consideration of interest rate differentials between the two currency regions and how these differentials impact the forward pricing of the contracts.