What is the money market hedge?
This is a synthetic forwardThe firm can use the $ and money markets to turn uncertain future $ receipts into known $ receipts today
Borrow PV of 1m in UK receive 1,000,000/(1+ rfa) = 1,000,000/(1.025)Convert into $ today receive $[1,000,000/(1.025)] 1.764 = $1,720,976Owe lender 1m in 90 days repay with 1m payment from UK firmSo the firm has $ now and has eliminated currency exposure in 90 days
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