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Real Cost: Spot Rate & Hedging

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A US company negotiated a forward contract to buy 100,000 British pounds in 90 days. The company was supposed to use the £100,000 to buy British supplies. The 90-day forward rate was $1.40 per pound. On the day the pounds were delivered in accordance with the forward contract, the spot rate of the pound was $1.44. What was the real cost of hedging the pound payables in this example?

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Solution Summary

This solution explains how to solve a question involving the real cost of hedging a foreign currency.

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Hedging is a tool used by, in this case, a company in order to limit or minimize their risk. In the case described, the US company hedged the GBP at an exchange rate of ...

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