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Currency risk management

Money Market Hedges (MMH)

6.1 Basic ideas

 Avoid future (uncertain) exchange rate by making exchange now at (known)
spot rate.

 Use interest rates to create assets and liabilities that 'mirror' the future assets
and liabilities.

6.2 Operation

Future foreign CF? Payment Receipt

 Step 1: borrow Borrow in home currency Borrow in foreign currency

 Step 2: convert Convert to foreign currency Convert to home currency at
at spot spot

 Step 3: deposit Deposit foreign currency Deposit home currency

 Step 4: future Use deposit to pay supplier Receipt from customer
transaction date settles outstanding liability

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