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John Moffat.
John Moffat.-
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Anonymous
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Is it true that in money market hedging we are actually having a Matching concept for hedging the Foreign Exchange rate risk which you explained in your lecture that:
Matching is where if we are due to receive US$2m in 3-months time. We would suffer no currency risk if that US$2m could be used then to settle a US$2m liability; that would be matching the currency inflow and outflow. However, you don’t have a US$2m liability to settle then – so create one that can soak up the US$. You can create a US$ liability by borrowing US$ now and then repaying that in three months with the US$ receipt.
Isn’t it exactly what we do in money market hedge?
John Moffat
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They are not the same.
Matching is having both income and expense in the same currency so that exchange rate changes effect both and so there is no net effect.
Money market hedging is dealing just with a receipt of just with a payment. We convert the money at today’s spot rather that convert on the due date by which time the exchange rate may have changed.
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