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ACCA FM · Guided practice (Show me how)

Chapter 23: Foreign exchange risk management

Money market hedging - receipts and payments

Rates are dollars per pound; interest rates are annual and quoted deposit - borrowing. Round each money amount to the nearest unit before the next step, as the notes do.

(a) P is due to receive $5M in 3 months' time. Spot: $/GBP 1.5384 - 1.5426. Current 3-month interest rates (annual): US prime 5.2% - 5.8%; UK interest rate (the notes: UK LIBOR) 3.6% - 3.9%. Show how P can use the money markets to hedge the risk.

(b) Q is due to pay $8M in 3 months' time. Spot: $/GBP 1.6201 - 1.6283. Current 3-month interest rates (annual): US prime 6.4% - 6.9%; UK interest rate (the notes: UK LIBOR) 9.2% - 9.9%. Show how Q can use the money markets to hedge the risk.

  1. (a) P: hedging a dollar receipt

    Calculate P's foreign borrowing, spot pound proceeds and fixed pound receipt at the specified maturity date under the money market hedge.

  2. (b) Q: hedging a dollar payment

    Calculate Q's foreign deposit, spot pound cost and fixed pound repayment at the specified maturity date under the money market hedge.

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