In the presence of bid-offer spreads, there will be indifference between the hedge and no-hedge decisions with respect to receivables when:
A) the offer interest parity forward rate is equal to the expected offer spot rate
B) the offer interest parity forward rate is equal to the expected bid spot rate
C) the bid interest parity forward rate is equal to the expected offer spot rate
D) the bid interest parity forward rate is equal to the expected bid spot rate

Question

Quizplus · Accepted Answer

The indifference between hedging and not hedging receivables occurs when the bid interest parity forward rate is equal to the expected bid spot rate. This means that the cost of hedging (using the forward rate) is equal to the expected cost of not hedging (using the expected spot rate), making the decision between the two neutral.

In the Presence of Bid-Offer Spreads, There Will Be Indifference