Assume that Suffolk Co. Negotiated a forward contract to purchase 200,000 Britis

Question

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 pound to be purchased were to be used to purchase British supplies. On the day the pound were delivered in accordance with the forward contract, the sopt rate of the British pound was $1.44. What was the real cost of hedging the payables for this U.S firm? Did the firm gain or lose by hedging? Please show steps 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 pound to be purchased were to be used to purchase British supplies. On the day the pound were delivered in accordance with the forward contract, the sopt rate of the British pound was $1.44. What was the real cost of hedging the payables for this U.S firm? Did the firm gain or lose by hedging? Please show steps Please show steps

Explanation / Answer

Total payable = 200,000 GBP

Forward rate = $1.40

Spat rate at date of delivery - $1.44

Real cost of hedging the payables for this U.S firm is calculated below:

Real cost = 200,000 × ($1.44 - $1.40)

                = 200,000 × 0.04

                 = $8,000

Hence, real cost of hedging the payables for this U.S firm is $8,000.

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