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Lets say a country whose currency is peso, we have a receipt of 1000 pesos in 6 months time,our currency is pounds but that peso has no exchange rate against pound given in question neither borrowing rate in that currency is given, instead there is link between peso and dollar(they are pegged against each other).
so can a money market hedge be constructed using dollars exchange rate against pound i.e a dollars money market hedge and using dollar’s borrowing rate?Yes certainly.
You would set up the money market hedge exactly as normal, but in dollars on the dollar equivalent of the pesos (and then in six months time convert the peso receipt into dollars).
BUT the one point you must make if it were asked in the exam, is that the big risk remaining would be that the peg between the peso and the dollar could change. Provided the peg stays the same then everything is fine, but there is the risk of the peg changing (especially if peso-land and dollar-land have inflation rates that are a lot different).
You cannot do numbers on this peg problem, but it would be good point to make in your answer.
So we first convert the pesos in dollars and from there on the calculation is exactly of a dollar vs pound hedge?
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