Money Corp.frequently uses a forward hedge to hedge its Malaysian ringgit (MYR)receivables.For the next month,Money has identified its net exposure to the ringgit as being MYR1,500,000.The 30-day forward rate is $.23.Furthermore,Money's financial center has indicated that the possible values of the Malaysian ringgit at the end of next month are $.20 and $.25,with probabilities of.30 and.70,respectively.Based on this information,what is the expected real cost of hedging receivables
A) $0.
B) -$7,500.
C) $7,500.
D) none of the above

Question

Quizplus · Accepted Answer

The expected real cost of hedging receivables can be calculated as:
[(Prob. of MYR decreasing x Forward rate) - (Prob. of MYR increasing x Forward rate)] x Net exposure
= [(.30 x $.23) - (.70 x $.23)] x 1,500,000
= (-$.015) x 1,500,000
= -$22,500

Therefore, the expected real cost of hedging receivables is $7,500, as it is the opposite of the calculated expected cost. Choice C) is the correct answer.