Assume zero transaction costs. If the 180day forward rate is an accurate estimate of the spot rate 180 days from now,then the real cost of hedging receivables 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 180day forward rate is an accurate estimate of the spot rate 180 days from now,then the real cost of hedging receivables 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 forward rate accurately predicts the spot rate, then there is no difference between the cost of hedging and the actual spot rate. Therefore, there is no cost or benefit to hedging receivables, resulting in a real cost of zero.

Assume Zero Transaction Costs