Given an example of how a money market hedge is constructed? What wil

Given an example of how a money market hedge is constructed?

What will be an ideal response?

ANSWER

Answer: If the underlying business transaction gives you a liability in foreign currency, you can borrow domestic currency, convert the principal from the borrowing into foreign currency, and invest the foreign currency thereby acquiring a foreign currency asset that is equivalent in value to the underlying foreign currency liability. You would want to borrow an amount of domestic currency equal to the present value of the foreign currency liability when converted at the spot exchange rate.