00:01
So, here two parts are given for question at part a.
00:06
We want to explain about the money market hedging strategy.
00:17
So, what is the strategy basically the hedge of the risk of exchange rate fluctuations the us firm can use money market hedging strategy.
00:26
So, how it can be done number one they can borrow euros.
00:33
So, the us firm can borrow euro in a million from the money market at six months german interest rate of 5 % so this borrowing will provide the necessary euros to pay the german firm.
00:51
So, the one thing is this the second is convert euro to dollars.
01:02
So, after borrowing euros the us firm can convert the borrowed euro to us dollars at the current spot exchange rate of one dollar per euro at this will provide the us firm with the required amount of dollars to pay the german firm next invest in dollars.
01:24
So, these actions can be taken by the us firm.
01:30
So, investing dollars now the us firm can invest the converted dollars in the us money market at this six month us interest rate of 3 % so this investment will help the us firm can earn interest on dollars while waiting to pay the german firm and the next one will be repay the euro loan.
01:58
So, after six months when the loan become due the us firm will repay 10 million euro loan using the dollar earned from the investment.
02:10
So, this is the kind of the thing which the euro firm can do these steps for using the euro money and by using the hedging market hedging strategy now, so by using the market money market hedging strategy the us firm can lock in the exchange rate at this portrait on in interest on dollars and ensure that it has enough euro to pay the german firm when payment is due.
02:39
Now, the second part of the question is ask about forward hedging strategy...