Assume zero transaction costs. If the 90-day forward rate of the euro underestimates the spot rate 90 days from now, then the real cost of hedging payables will be:
A) positive.
B) negative.
C) positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a discount.
D) zero.

Question

Assume zero transaction costs. If the 90-day forward rate of the euro underestimates the spot rate 90 days from now, then the real cost of hedging payables will be:​
A) ​positive.
B) ​negative.
C) ​positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a discount.
D) ​zero.

Quizplus · Accepted Answer

If the 90-day forward rate of the euro underestimates the spot rate 90 days from now, the real cost of hedging payables will be negative because the company will end up paying less for euros than the market rate at that future time, thus saving money on the transaction.

Assume Zero Transaction Costs