Which of the following hedging methods will NOT be suitable for hedging the euro receipt?
A Forward exchange contract
B Money market hedge
C Currency futures
D Currency swap
The correct answer is D but I couldn't understand that why Currency Swap is not suitable for hedging the Foreign exchange rate even though it is mentioned in the notes as one of the hedging techniques? Please explain!
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Hedging methods NOT be suitable for hedging
5y ago#1You do not state what euro receipt is being referred to.
I would guess that it is a receipt in the near future.
Currency swaps are not relevant for individual 'one-off' receipts are are long-term rather than short-term hedging.
I do explain this in my free lectures.
Yes, you are correct that the company expects to receive €1,500,000 in six months’ time. :)
Can you please explain what you meant by "individual one-off receipts"?
And the rest of the methods for hedging are short-term such as Forward Contracts, Money Market hedge, Futures, Options?
Thanks for your reply :)
5y ago#3Swaps are more relevant if they are borrowing (or depositing) money for a longer period and there is therefore interest each year rather than just one receipt or one period.
The other methods are all suitable for hedging short-term risk.
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