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Please correct me here! I’m having trouble understanding the logic of Market Hedging.
In case of Receipt case of Market Hedging:
1) We Borrow Foreign Currency Loan TODAY [which we have to pay at some point]
2) Convert these into Local currency at current spot rate [which is equivalent of Present value of Foreign currency that we calculated above – in step 1]
3) Then, we deposit Converted Local Currency into the BANK
4) When we will receive the money from customer, we use the customer receipt to repay foreign currency loan that we took in Step 1In case of Payment case of Market Hedging:
1) We Borrow Local Currency Loan TODAY [which we have to pay at some point]
2) Convert these into Foreign currency at current spot rate [which is equivalent of Present value of Local currency that we calculated above – in step 1]
3) Then, we deposit Converted Foreign Currency into the BANK
4) When the time of Payment comes in future, we use the deposit to make payment & at same time, we repay Local Currency loan that we took in Step 1[BUT in case of PAYMENT Hedging, we have to work out backward as u said in the lecture] right?
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