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Can you please help with the below:
The company could put cash on deposit in the European country at an annual interest rate of 3% per year and borrow at 5%. The company could put cash on deposit in its home country at an annual rate of 4% per year and borrow at 6% per year.
I don’t understand why, when calculating a money market hedge, the European rates not home country rates were used here…
thank you
You have not given the full question!
However, with a money market hedge, both interest rates are relevant. Depending on whether they are paying or receiving the foreign current. then they will either deposit at the foreign interest rate and borrow at the home interest rate, or will borrow at the foreign interest rate and deposit at the home interest rate.
I really do suggest that you watch my free lectures on money market hedging!
(Our free lectures are a complete course for Paper F9 and cover everything you need to be able to pass the exam well.)
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