From the perspective of Detroit Co., which has payables in Mexican pesos and receivables in Canadian dollars, hedging the payables would be most desirable if the expected real cost of hedging payables is ____, and hedging the receivables would be most desirable if the expected real cost of hedging receivables is ____.
A. High; High
B. High; Low
C. Low; High
D. Low; Low
From the perspective of Detroit Co., which has payables in Mexican pesos and receivables in Canadian dollars, hedging the payables would be most desirable if the expected real cost of hedging payables is LOW, and hedging the receivables would be most desirable if the expected real cost of hedging receivables is HIGH.
The reason for this is that when Detroit Co. hedges its payables in Mexican pesos, it wants the cost of hedging to be low. This is because if the cost of hedging is high, then it would be more expensive for Detroit Co. to convert its Mexican pesos into Canadian dollars to make the payments for its payables.
On the other hand, when Detroit Co. hedges its receivables in Canadian dollars, it wants the cost of hedging to be high. This is because if the cost of hedging is low, then it would be cheaper for Detroit Co. to convert its Canadian dollars into Mexican pesos when it receives payments. This would result in a lower amount of Mexican pesos for Detroit Co. when it converts the Canadian dollars, meaning that Detroit Co. would receive fewer Mexican pesos than it expected.