Assume zero transaction costs. If the 180-day forward rate overestimates the spot rate 180 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 180-day forward rate overestimates the spot rate 180 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 180-day forward rate overestimates the spot rate 180 days from now, the real cost of hedging payables will be positive because the company will pay more for the currency in the forward market than it would have paid in the spot market at the time of settlement.

Assume Zero Transaction Costs