Explain the process of a money market hedge for a foreign currency obligation. a

Question

Explain the process of a money market hedge for a foreign currency obligation. a. Estimate the size of your contractual foreign currency obligation. Buy that much foreign currency at the spot rate, pay early. b. Estimate the size of your foreign currency obligation. Buy enough call options to meet this obligation. At maturity, exercise the calls. c. Estimate the size of your contractual foreign currency obligation in dollars using the forward rate. Find the present value of that using the U.S. dollar interest rate. Buy the present value of the foreign currency obligation at the spot exchange rate. Invest the proceeds at the foreign currency interest rate. d. Estimate the size and timing of your contractual foreign currency obligation. Find the present value of the obligation using the foreign currency discount rate. Buy the present value of the foreign currency obligation at the spot exchange rate. Invest the proceeds at the foreign currency interest rate.

Explanation / Answer

Answer:d  Estimate the size and timing of your contractual foreign currency obligation. Find the present value of the obligation using the foreign currency discount rate. Buy the present value of the foreign currency obligation at the spot exchange rate. Invest the proceeds at the foreign currency interest rate.

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