EXPLAIN THE PROCESS OF A MONEY MARKET HEDGE FOR A FOREIGN CURRENC...

106. Explain the process of a money market hedge for a foreign currency obligation. a. Estimate the size of your contractual foreign currency obligation in dollars using the forward interest rate. 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. Buy that much foreign currency at the spot rate, pay early. 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.