Advise the company whether it should adopt forward cover or money market cover? Under what circumstances, money market hedge is advantageous to…

7 Amount Payable under Forward Cover (€ 85,000 × ₹ 92.60) ₹ 78,71,000 Money Market Hedge To pay € after 3 months' company shall requires to borrow in ₹ and translate to € and then deposit in €. For payment of € 85,000 in 3 months @ 4.00% interest p.a. the amount required to be deposited now (€ 85,000/1.01) = € 84,158.42 With spot rate of 90.50 the loan needed will be = 76,16,337.01 Loan repayable after 3 months @ 8.00% p.a. interest will be - 76,16,337.01 (1.02) = 77,68,663.75 Net Benefit = 78,71,000 - 77,68,663.75 = 1,02,336.25 In this case the money market hedge is a cheaper option. Money market hedge is advantageous to forward cover as under: (i) When forward contracts are not available or forward rates are not attractive. (ii) As soon as we create money market hedge, we fix the future rate. This eliminates downside risk due to adverse exchange rate movements. (iii) It is more flexible if we consider the amount to be covered.