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Money Market Hedge
As its evident that 1,150,000 needs to be paid in 5 months time.
Money market hedge involves converting the foreign currency at spot now which makes future changes to spot irrelevant,
After reviewing examiner answer I am totally confused as how the examiner has answered this part.
I would be grateful if you can explain it in some easy wordings.
Although we buy $’s now, the $’s are put on deposit for 5 months until the payment is due. Because the deposit earns interest we need to buy fewer $’s now.
To buy the $’s we borrow Pounds now. In 5 months time we repay the borrowing together with interest.
This is all explained in detail, with examples, in my free lectures on foreign exchange risk management.