A firm owes a large future payment that must be made in a foreign currency and wants to hedge the associated exchange rate risk. Which one of the following identifies the cost of such a hedge?

Question

Quizplus · Accepted Answer

The cost of hedging exchange rate risk for a future payment in a foreign currency using a forward contract is the difference between the forward rate (the rate agreed upon today for a future transaction) and the expected future spot rate (the rate at which one anticipates being able to exchange the currency in the future without a hedge). This difference represents the cost or benefit of locking in an exchange rate now versus the expected rate at the time of the future transaction.

A Firm Owes a Large Future Payment That Must Be