Money market hedges - part 3

In this lesson

1. 0:00 Money market hedge for foreign receipts
2. 1:28 Working backwards: calculating borrowed amount
3. 2:15 Converting foreign currency to home currency
4. 3:03 Depositing home currency and earning interest
5. 3:40 Worked example: Underbelly Swiss francs scenario
6. 5:01 Stage one: stripping out foreign interest
7. 6:28 Stage two: converting to home currency
8. 8:02 Stage three: depositing and calculating final value
9. 9:26 Summary and key takeaways

About this lesson

You'll discover how this approach mirrors the dollar payment hedge, but with all transactions reversed: you borrow in the foreign currency, convert to your home currency, and deposit it to earn interest. By working through a practical example involving a Swiss franc receipt, you'll master the three-step calculation process and understand how money market hedges effectively replicate forward rates through interest rate parity. This video breaks down the methodology step by step. First, you strip out foreign currency interest from your receipt by working backwards using the foreign borrowing rate. Second, you convert the foreign currency amount to your home currency using the bid rate (since you're selling to the bank). Third, you deposit your home currency and earn interest at the deposit rate. The worked example uses realistic spot rates and interest rates to show how an €8 million Swiss franc receipt converts to an effective forward rate, giving you a concrete model to apply to exam questions. By the end, you'll understand not just the mechanics of money market hedges for receipts, but also why they work and when to use them as an alternative to forward contracts. The key is practising these three steps repeatedly until the logic becomes second nature—this is a technique that appears regularly in case studies and objective tests, so mastering it now builds real exam confidence.

Duration: 11m