You're hoarse from explaining to your supervisor that the cost,if any,of hedging exchange rate risk can be thought of as an insurance premium to avoid surprises.What is the cost of hedging a 2 million euro commitment if the spot rate is €1.6/$,the forward rate is €1.55/$,and the expected spot rate at the end of the hedge is €1.6/$?

Question

Quizplus · Accepted Answer

The cost of hedging can be calculated as the difference between the forward rate and the expected spot rate, multiplied by the amount being hedged. In this case, the cost of hedging would be:
($1.55/€ - $1.6/€) x €2,000,000 = $0.05/€ x €2,000,000 = $100,000
Therefore, the cost of hedging is $100,000, which is equivalent to €62,500. The answer closest to this is C ($40,323), which could be due to rounding or different assumptions made in the calculation.

You're Hoarse from Explaining to Your Supervisor That the Cost,if