The real cost of hedging payables with a forward contract equals:
A) the nominal cost of hedging minus the nominal cost of not hedging.
B) the nominal cost of not hedging minus the nominal cost of hedging.
C) the nominal cost of hedging divided by the nominal cost of not hedging.
D) the nominal cost of not hedging divided by the nominal cost of hedging.

Question

Quizplus · Accepted Answer

The real cost of hedging is the difference between the cost of hedging and the cost of not hedging. The nominal cost of hedging is the cost of the forward contract, and the nominal cost of not hedging is the cost of the spot exchange rate. The real cost of hedging is therefore the nominal cost of hedging minus the nominal cost of not hedging.

The Real Cost of Hedging Payables with a Forward Contract