Real Cost of Hedging Payables. Assume that Suffolk Co. negotiated a forward contract to purchase 200,000 British pounds in 90 days. The 90day 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?

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.

Why is the Answer - $8000 and not just 8000

Are you not saving 8000 by hedging, Locking in the 200000GBP at a rate you only have to pay $280 000 for and not $288000