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Dear sir,
I have watched your lecture on money market hedging and I’ve got a doubtIn eg 6 of the notes you say that P borrows a value which added to the interest gives $ 5 mn. How does that work because I didn’t understand that? Aren’t we supposed to pay an interest when we borrow? If so, shouldn’t we borrow a value above $ 5 million so as to compensate for the risks?
Hope you can help me out!
Thanks!
We certainly do pay interest when we borrow money. They have to make sure that the money received later will be enough to repay the money borrowed now plus interest on it. So the amount borrowed now is less than the amount than the amount that they will end up having to pay (and will use the money received in order to repay).
It has nothing to do with compensating for risks. The only risk is that of exchange rates changing, and money market hedging removes that risk.
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