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Hi, can I know what is the practical difference between using money market hedge vs going down to any bank branch or money changer to exchange a bulk of foreign cash, since both methods of hedging are using spot rate?
Anyone can go down to any bank to exchange on the spot, so why the hassle using Money Market Hedge? Pardon this may be a silly question but I am quite puzzle on practical aspect. Thanks
But the whole purpose of a money market hedge (and all hedging of foreign exchange risk) is to effectively fix an exchange rate today when the transaction will occur on a future date.
If you are going to receive foreign currency in (say) 3 months time, then obviously you can go to the bank and convert in 3 months time, but you have no idea what the exchange rate will be in the 3 months time – it could be anything, and that is the risk, the risk of the change rate changing.
I really do suggest that you watch my free lectures on foreign exchange risk management – it is examined in almost every AFM exam.
Thanks John, this is helpful. I think probably money changer shouldn’t have come to my mind considering the volume of forex transaction usually in Millions (US$). I’ll be watching your lectures soon, hopefully i can understand the relationship behind the numbers (e.g implication on interest rate risk with hedging technique such as money market when using Interbank Offered Rate).
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