DEC hedges a FF 3.2 million receivable due in 180 days. The current spot rate is FF 1 = $0.18834 and the 180?day forward rate is FF 1 = $0.18625. If the spot rate at the end of 180 days is $0.18728, how much has the forward market hedge cost DEC?
A) $6,688
B) $3,392
C) $3,296
D) DEC gains $6,688 on the hedge

Question

Quizplus · Accepted Answer

The amount hedged is FF 3.2 million. 
The cost of forward hedge = (FF 3.2 million x (FF 1 = $0.18625) - (FF 3.2 million x FF1 = $0.18834)) 
= (-$599,680). 
However, since the spot rate at the end of 180 days is $0.18728, the hedged amount is worth ($0.18728 x FF 3.2 million) = $601,856 in dollars. 
Therefore, the net gain from the hedge is $601,856 - (-$599,680) = $3,176. 
So, the forward market hedge cost DEC $3,296. 
Therefore, the correct answer is C.

DEC Hedges a FF 3