Real Cost of Hedging Payables. Assume that Suffolk Co. negotiated a forward cont
ID: 2734725 • Letter: R
Question
Real Cost of Hedging Payables. Assume that Suffolk Co. negotiated a forward contract to purchase 200,000 British pounds in 90 days. The 90 day forward rate was $1.40 per British pound. The pounds to be purchased were to be used to purchase British supplies. On the day the pounds were delivered in accordance with the forward contract, the spot rate of the British pound was $1.44. What was the real cost of hedging the payables for this U.S. firm? What was the real cost of hedging the payables for this U.S. firm if the spot rate of the British pound was $1.34?
A) –$8,000, $280,000, $12,000
B) $8,000, $179,000, $13,000
C) –$7,450, $280,000, $12,000
D) $7,450, $179,000, $13,000
Explanation / Answer
The U.S. dollars paid when hedging
= $1.40(200,000)
= $280,000.
The dollars paid if unhedged = $1.44(200,000) = $288,000.
The real cost of hedging payables = $280,000 –$288,000 = –$8,000.
The U.S. dollars paid when hedging = $1.40(200,000) = $280,000.
The dollars paid if unhedged= $1.34(200,000) = $268,000.
The real cost of hedging payables = $280,000 – $268,000 =$12,000.
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