Ø Money market hedging

Money market hedging involves borrowing in one currency, converting the money borrowed into another currency and putting the money on deposit until the time the transaction is completed, hoping to take advantage of favourable exchange rate movements.

u Setting up a money market hedge for a foreign currency receipt (Exports)

Step 1 Borrow an appropriate amount in the foreign currency today.

Step 2 Convert it immediately to home currency at the spot rate.

Step 3 Place this on deposit in the home currency.

Step 4 When the receivable's cash is received:

(a) Repay the foreign currency loan.

(b) Take the cash from the home currency deposit account.