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Please help me understand the money market hedging. If $ is foreign currency & GBP is local currency.
If we are receiving foreign currency then we firstly borrow $’s now from Foreign bank & convert them to GBP and deposit them in the local bank so that we will be able repay the foreign currency loan.
If we are paying foreign currency then we firstly deposit $’s now in Local bank & convert them to $’s and borrow $’s from Foreign bank
Please correct me if I am wrong! I have already seen ur lecture but I could not get it.
If we are receiving foreign currency then we firstly borrow $’s now from Foreign bank & convert them to GBP and deposit them in the local bank. When the $’s are received from the customer we use them to repay the $ loan. We take the GBP deposit together with the interest earned.
If we are paying foreign currency then we borrow GBP’s and convert them to $’s. We then deposit the $’s until we need to make the payment Then we use the deposit to make the payment and at the same time we repay the GBP loan.
I do suggest that you watch the lecture again.
I’m confused here, Sir! You said ‘we borrow GBP’s and convert them to $’s & then deposit $’s until we make payment.
But when we are paying foreign currency, we firstly deposit $’s in Foreign bank & convert them to GBP’s and borrow GBP’s from Foreign bank. Just like in example 7 given in the notes (pg 113).
Please explain this to me!
We cannot deposit $’s until we have borrowed Pounds and converted them into $’s.
However, in order to find out how many pounds we need to borrow we need to calculate how many $’s will need to be deposited so as to make sure that after interest is added on we have enough $’s to make the payment.
In other words, for the calculation’s sake [just like in example 7 of your notes], we first start with the deposited Foreign Currency in a Foreign bank because we are not aware of the BORROWING local currency.
Then we convert them to Local Currency and IN THE LAST, the calculation of borrowing Local Currency from the Local bank would be known. Is that right SIR?
Thanks for your time SIR, I appreciate it, 🙂
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