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International Finance

10. Real Cost of Hedging Receivables. Assume that Bentley Co. negotiated a forward contract to sell 100,000 Canadian dollars in one year. The one-year forward rate on the Canadian dollar was $.80. This strategy was designed to hedge receivables in Canadian dollars. On the day the Canadian dollars were to be sold in accordance with the forward contract, the spot rate of the Canadian dollar was $.83. What was the real cost of hedging receivables for this U.S. firm?

Repeat the question, except assume that the spot rate of the Canadian dollar was $.75 on the day the Canadian dollars were to be sold in accordance with the forward contract. What was the real cost of hedging receivables in this example?

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ANSWER:

The nominal amount of hedged receivables = $.80(100,000) = $80,000.
The nominal amount of ...

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$2.19