Encana Inc,a Canadian firm has a US dollar payable which it hedges using a forward market contract.The Canadian dollar is quoted directly.Which of the following statements is true?

Question

Quizplus · Accepted Answer

If the spot rate is greater than the forward rate at maturity, Encana would have been locked into a lower exchange rate with the forward market contract, but can now take advantage of the higher spot rate by not exercising the contract and exchanging the currency at the spot rate instead. Therefore, Encana is better off without the hedge. However, because it is a payable, Encana is still obligated to pay the amount in US dollars, which may have increased due to the higher spot rate. By using the forward market contract, Encana is able to lock in a rate and avoid the risk of having to pay a higher amount in Canadian dollars.

Encana Inc,a Canadian Firm Has a US Dollar Payable Which