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Hello sir can u kindly explain this phrase from bpp text …. What does it mean:
“ if money market hedging produces very different results than forward contracts then speculators could make money without taking risk’
As you will know from my free lectures, a money market hedge effectively results in fixing an exchange rate on a future date. If it resulted in a difference from instead using a forward rate then what you could do is organise a money market hedge and at the same time use the forward rate to convert the money back on the future date – in that way you could make a profit.
Obviously the markets would not allow this to happen, which is why (as I explain in my lectures) the forward rates are fixed by money market hedging.
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