In a forward hedge, if the forward rate is an accurate predictor of the future spot rate, the real cost of hedging payables will be:
A) highly positive.
B) highly negative.
C) zero.
D) none of the above

Question

Quizplus · Accepted Answer

If the forward rate is an accurate predictor of the future spot rate, the real cost of hedging payables will be zero as the hedger will be able to exchange the currency at the locked-in forward rate, which will be the same as the actual spot rate at the future date of transaction. This eliminates any potential gains or losses from exchange rate fluctuations, resulting in a real cost of zero.

In a Forward Hedge, If the Forward Rate Is an Accurate