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Dear Mr John,
When using money market hedging, I see we seem to assume that company doesn’t have enough money at current date, therefore it must borrow home currency (in case of future payment) or foreign currency (in case of future receipt). However, I wonder if company does have enough money, for example home currency (in case of future payment), does it still borrow in order to use money market hedging?
Tks you very much!
No – they do not have to borrow money (I do say in the free lecture that they can stop without borrowing money).
However that would mean paying out money earlier than we otherwise would do (because we would not be paying the supplier until later) so by borrowing we still end up paying on the same date, but a fixed amount. Also it is then easier for comparing with using forward rates.
Thank you sir for your explanation.
Does it means that if we face a question relating to choosing cheapest method of hedging, we should assume that we still borrow money to do money market hedging? Forgive me if I missed but I have not found this kind of question in the lecture?
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