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I did not properly understand example 6 in money market hedging.
In the end of the lecture you said that we receive 5m in 3 months time, which will repay the 5m borrowed. And then u also said the pound deposit matures and we receive fixed 3223709 pounds in 3 months.
My doubt is how on earth will we be able to repay the 5m loan borrowed if it is getting converted at spot rate in pounds and then sitting that is invested in Uk bank at an interest of 0.9%.
Also how will the end result be that we get a fixed receipt of 3223709 , when it should be a loan amount…..If we did not do hedging then in 3 months time we would receive $5M and convert it to pounds at spot.
The money market hedge means what happens is that in 3 months time the $5M received is used to repay the $’s that have been borrowed. At the same time, we receive the Pounds that we have deposited together with interest.
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