You are hoarse from explaining to your supervisor that the cost, if any, of hedging exchange-rate risk can be thought of as an insurance premium to avoid surprises.What is the cost of hedging a €2 million commitment if the spot rate is €1.6/$, the forward rate is €1.55/$, and the expected spot rate at the end of the hedge is €1.6/$?
A)$0
B)$25,000
C)$40,323
D)$68,966

Question

Quizplus · Accepted Answer

The cost of hedging is the difference between the forward rate and the expected spot rate multiplied by the amount of the commitment. In this case, the cost of hedging is (€1.55 - €1.6) x €2 million = €10,000.

You Are Hoarse from Explaining to Your Supervisor That the Cost