Assume Zero Transaction Costs

question 28

Multiple Choice

Assume zero transaction costs. If the 90-day forward rate of the euro underestimates the spot rate 90 days from now, then the real cost of hedging payables will be:​

• A) ​positive.
• B) ​negative.
• C) ​positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a discount.
• D) ​zero.

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Definitions:

Underestimating Cost

The act of calculating or predicting a cost to be lower than it eventually turns out to be.

Personally Liable

The legal responsibility of an individual to fulfill a debt or obligation from their own assets.

Partnership Debt

Financial obligations for which all partners in a partnership are jointly and severally liable.

New Ovens

Recently manufactured or acquired cooking appliances designed for baking, heating, or drying food.