Money market hedges - part 2

In this lesson

1. 0:00 Money market hedge steps explained
2. 3:06 Working backwards in calculations
3. 5:39 Bean and Hop worked example setup
4. 6:03 Stage one removing deposit interest
5. 7:22 Stage two converting to home currency
6. 9:35 Stage three adding borrowing costs
7. 11:01 Effective exchange rate calculation

About this lesson

You'll discover why money market hedges work by understanding interest rate parity theory, then master the three-stage calculation process: removing foreign deposit interest, converting to home currency at the spot rate, and adding home borrowing costs. By working through a detailed example with Bean and Hop's $5 million dollar payment, you'll see how to handle time-apportioned interest rates, select the correct exchange rates, and arrive at the final sterling cost—essential skills for FM, AFM, and SBL exam success. Money market hedges can feel counterintuitive at first because the calculation works backwards from the payment you need to make, not forwards through the transactions you'd actually enter. This lesson breaks down each stage clearly: starting with your known overseas payment, stripping out the interest you'd earn on a foreign deposit, converting back to your home currency, and then adding the interest cost on your home currency borrowing. You'll learn why you must use specific rates—the deposit rate for foreign interest, the spot offer rate for conversion, and the borrowing rate for home currency costs—and how to time-apportion all interest correctly when rates are quoted annually. By the end, you'll be confident tackling money market hedge calculations under exam conditions, understand the mechanics behind why this hedge works, and be able to calculate the effective exchange rate your hedge creates. Practice is essential with this technique, so work through the numbers alongside the lesson and revisit it as needed to build real mastery.

Duration: 11m