Money Market Hedging of Payables

An explanation of currency hedging in money markets by a U.S. importer

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• +baruchcollege

[collegefinance]

We have to keep in mind that a money market hedge is simply a time shift of cash flows to lock the existing spot rate. There are multiple cash flows but only one payment involved, not two.

Instead of making the payment in 90 days to the supplier, the importer borrows, converts the home currency to lock in exchange rates, and makes a deposit in the foreign currency. When the deposit matures, he'll withdraw the amount and use it to pay the supplier.

He can pay the bank using working capital.

[Mohammadabdelkader]

@trandify thnx trandify so much for your help

[Mohammadabdelkader]

@collegefinance thnx so much for your clarification

[trandify]

@Mohammadabdelkader (continued from my first post below) The importer borrows the equivalent of 10million Euros now in US dollars, convert it at the current spot rate and effectively, converts the US dollars equivalent of Euro10 million now. This means he has Euro 10 million now which he can put in a deposit in Europe and pay back the supplier in 90 days.

[trandify]

@Mohammadabdelkader Assume that the company already has the capital to pay back the local bank. The whole purpose of this is to LOCK IN THE CURRENT SPOT RATE because(let's assume) the importer assumes that the euro dollar might appreciate in 90 days. Think about it, would you rather pay US$1.40 for 1 Euro now or pay US2.00 for 1 Euro in 90 days?

[najsa]

These have been very helpful! Thank you!