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Foreign exchange risk

5.3 Money market hedges

Hedging a payment – 3 steps

 divide the foreign currency payment amount by (1 plus the foreign currency
deposit rate for the time period in question)

 take the figure calculated and translate it to the home currency at the spot rate

 take the figure calculated and multiply it by (1 plus the home currency
borrowing rate for the time period in the question)

NB. May have to adjust given annual interest rates to the time period of the question
scenario.

Hedging a receipt – 3 steps

 divide the foreign currency receipt amount by (1 plus the foreign currency
borrowing rate for the time period in question)

 take the figure calculated and translate it to the home currency at the spot rate

 take the figure calculated and multiply it by (1 plus the home currency deposit
rate for the time period in the question)

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