A UK based exporter exported goods to USA. The Invoice amount is $ 7,00,000 and credit period is 3 months. Exchange rates in London are as follows:…

Amount expected to be received under Money Market Hedge. Identify: Foreign currency is an asset. Amount $ 7,00,000. Create: $ Liability. Borrow: In $. The borrowing rate is 9% per annum or 2.25% per quarter. Amount to be borrowed: 7,00,000 / 1.0225 = $ 6,84,596.58 Convert: Sell $ and buy £. The relevant rate is the Ask rate, namely, 1.5905 per £, (Note: This is an indirect quote). Amount of £s received on conversion is 4,30,428.53 (6,84,596.58 / 1.5905). Invest: £ 4,30,428.53 will be invested at 5% for 3 months and get £ 4,35,808.89 Settle: The liability of $ 6,84,596.58 at interest of 2.25 per cent quarter matures to $7,00,000 receivable from customer. Using forward rate, amount receivable is = 7,00,000 / 1.6140 = £ 4,33,705.08 Amount received through money market hedge = £ 4,35,808.89 Gain = £ 4,35,808.89– £ 4,33,705.08= £ 2103.81 Justification: By following the prescribed steps under hedging we found the exporter receives £ 4,33,705.08 by using forward cover while he receives £ 4,35,808.89 through money market hedge. Thus, money market hedge helps exporter to receive £ 2103.81 more than the amount received using Forward contract. Hence it is more beneficial.