Fresno Corporation will have to pay 200,000 in 180 days. It has the following information.

• Spot rate of pound as of today: $1.50.
• 180-day forward rate of pound as of today: $1.51.
• Interest rates are as follows:

U.K. U.S.

180-day deposit rate 2.5% 4.5%

180-day borrowing rate 3.0% 5.0%

• Fresno Corporation forecasted the future spot rate in 180 days as follows

Possible Outcome Probability

$1.43 20%

$1.46 60%

$1.52 20%

1. To hedge the payable of 200,000, which hedging method would you choose between the forward hedge and the money market hedge? Justify your answer based on the nominal cost of hedging payable with each hedging method.
2. For the hedging method you choose in (1), compute the real cost of hedging relative to no hedge.