Money Market Hedging — OpenTuition Forums

SSourav5y ago

Sir, For money market hedging (Receipt) (Assuming we are in UK) In your lectures you said that we will borrow $ and convert it to £ Further £ would be deposited until maturity..Fair enough. But in real world does it really makes sense to invest £ in bank considering that bank gives 5-10% whilst our ROCE is 25-30%?? Is it an assumption that we invest £ until maturity.?

John MoffatTutor5y ago#1

We invest the Pounds until the date of the foreign currency receipt - if the receipt is in 3 months then we invest the pounds for 3 months (do not use the word 'maturity'). I do say in the lectures that there is no compulsion to invest the pounds. We do it simply so that we actually get the cash at the same time as we would have got it if we did no hedging and simply converted the foreign receipt at whatever the spot rate is in 3 months time. By using the money market we still get the cash on the same date, but the amount we get is a fixed amount and is not affected by changes in the spot rate.

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