Celine Co. will need €500,000 in 90 days to pay for German imports. Today's 90-day forward rate of the euro is $1.07. There is a 40 percent chance that the spot rate of the euro in 90 days will be $1.02, and a 60 percent chance that the spot rate of the euro in 90 days will be $1.09. Based on this information, the expected value of the real cost of hedging payables is $____.

Question

Quizplus · Accepted Answer

The expected spot rate in 90 days is calculated as (0.4 * $1.02) + (0.6 * $1.09) = $1.062. The forward rate is $1.07. The expected cost of hedging is (€500,000 * $1.07) - (€500,000 * $1.062) = $1,000.

Celine Co Will Need €500,000 in 90 Days to Pay for for German