Money Market Hedges

Question 1

Company paying foreign currency
Step 1

Answer 1

Company invests enough foreign currency now at the lending rate to have the correct amount to make a payment in x months time

Calculate adjusted deposit IR

Foreign currency amount needed now = transaction value/ (1+ adjusted deposit Ir)

Question 2

Company paying in foreign currency step 2

Answer 2

Company will have to buy currency at spot rate, pick the highest payement

Question 3

Company paying in foreign currency step 3

Answer 3

Assume you Borrow money at domestic currency borrowing rate

Calculate adjusted IR

Domestic currency owing at end of period = step 2 x (1+adjusted IR)

Question 4

Companies receiving foreign currency
Step 1

Answer 4

Company borrows at the foreign currency borrowing rate that will grow to the correct amount that will be paid off by receipt in x months

Calulate adjusted IR Foreign currency

Foreign currency amount needed = transaction value / (1+ adjusted borrowing Ir)

Question 5

Company receiving foreign currency
Step 2

Answer 5

Company will want it in domestic currency so will have to sell it at the spot rate now , lowest receipt,

Question 6

Company receiving foreign currency
Step 3

Answer 6

Invest the receipt now

Calculate adjusted IR
Domestic currency receipt = step 2 x (1+adjusted IR)