In the presence of bid-offer spreads the decision NOT to hedge payables in the money market will be taken if:
A) the offer interest parity forward rate is lower than the expected offer spot rate
B) the offer interest parity forward rate is higher than the expected offer spot rate
C) the bid interest parity forward rate is lower than the expected bid spot rate
D) the bid interest parity forward rate is equal to the expected offer spot rate

Question

Quizplus · Accepted Answer

The decision not to hedge payables in the money market would be taken if the offer interest parity forward rate is higher than the expected offer spot rate. This implies that the future cost of hedging (using the forward rate) is expected to be higher than the cost of not hedging and instead buying the currency in the spot market at the expected future rate.

In the Presence of Bid-Offer Spreads the Decision NOT to Hedge