Assume zero transaction costs. If the 90-day forward rate of the euro is an accurate estimate of the spot rate 90 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 90-day forward rate of the euro is an accurate estimate of the spot rate 90 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 90-day forward rate of the euro is an accurate estimate of the spot rate 90 days from now, then hedging payables using the forward contract will result in no gain or loss since the forward rate reflects the expected future spot rate. Therefore, the real cost of hedging will be zero.

Assume Zero Transaction Costs