Celine Co. will need €500,000 in 90 days to pay for German imports. Today's 90-day forward rate of the euro is $1.07. The spot rate of the euro in 90 days is forecasted to be $1.02. Based on this information, the expected value of the real cost of hedging payables is $____.

Question

Quizplus · Accepted Answer

The real cost of hedging payables is the difference between the forward rate and the expected spot rate. Here, the forward rate is $1.07, and the expected spot rate is $1.02. The difference is $0.05 per euro. For €500,000, the cost is €500,000 * $0.05 = $25,000. Since the forward rate is higher than the expected spot rate, the cost is negative, indicating a saving of $25,000.

Celine Co Will Need €500,000 in 90 Days to Pay for for German