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Chapter 12

6.3 Calculations

 Always start with the future foreign cash flow.

 E.g. to hedge a payment in a foreign currency:

– calculate foreign deposit as the PV of the future payment

– then calculate how much home currency you need to borrow.

 E.g. to hedge a receipt in a foreign currency:

– calculate foreign borrowing as the PV of the future receipt

– then convert into home currency and place on deposit.

6.4 Advantages and disadvantages of MMH

ADVANT DISADVANTAGES

 No currency risk  Complex

 Fairly low transaction costs  May be difficult to get overseas
loan
 Offer flexibility
 A company with a large overdraft
 May be able to use when forward may struggle to borrow funds now
contracts not available

6.5 Parities revisited

 IRPT implies that a forward contract and a MMH should give the same answer

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