A decision to hedge receivables in the forward market will be taken if:
A) the actual forward rate is higher than the expected spot rate
B) the actual forward rate is lower than the expected spot rate
C) the interest parity forward rate is lower than the expected spot rate
D) the interest parity forward rate is equal to the expected spot rate

Question

Quizplus · Accepted Answer

CA decision to hedge receivables in the forward market is taken if the actual forward rate is higher than the expected spot rate, as this implies that by hedging, the company can lock in a higher exchange rate now than what it expects to receive in the future, thereby protecting against currency depreciation. Similarly, if the interest parity forward rate is lower than the expected spot rate, it indicates that the market's forward rate is more favorable than what the company expects in the future, making hedging advantageous to lock in a better rate.

A Decision to Hedge Receivables in the Forward Market Will