Hedging methods NOT be suitable for hedging

This topic has 3 replies, 2 voices, and was last updated 1 year ago by John Moffat.

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June 3, 2021 at 5:33 pm #622984
HamzaYusuf
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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!
June 4, 2021 at 7:15 am #623044
John Moffat
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You 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.
June 4, 2021 at 4:42 pm #623192
HamzaYusuf
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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 🙂
June 5, 2021 at 9:05 am #623236
John Moffat
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Swaps 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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