Glossary

In terms of FX hedging, the foreign exchange opportunity cost measures the real cost of hedging. The cost of hedging is sometimes measured as the forward discount or premium. However, this approach is wrong because the relevant comparison must include the cash flow difference between hedging and not hedging, a calculation that requires the future (unknown) spot rate on the date of settlement. That is, the real cost of hedging is an opportunity cost. In terms of business strategy, the foreign exchange opportunity cost is the set of business opportunities that firms forego as they buy and sell in one or two currencies only. By doing so, they lose the opportunities afforded by ‘embracing’ currencies, both on the contracting side and on the selling side.