Question

1. Assume you are a US exporter with an account receivable denominated in Singapore dollars to be paid to you in one year. You are considering hedging currency risk using a forward contract market hedge or a money market hedge. Answer the following two questions:

-To hedge, would you go long or short the Singapore dollar in the forward market?

-To hedge, would you need to borrow or invest in the money market in Singapore?

                a) Long and invest

                b) Long and borrow

                c) Short and borrow

                d) Short and invest

Answer 1

Since the US exporter will receive Singapore Dollar after 1 year, which he will need to sell , for hedging the exposure , the Exporter needs to sell the Singapore Dollar today in the forward contract market. So, to hedge, one should go short the Singapore dollar in the forward market

Under money market hedge, the exporter will borrow the Singapore dollar today in such a manner that the entire maturity amount of the borrowing exactly matches the receivables in Singapore dollar, As the exchange rate today is known, the amount of US Dollars received today against the exposure can be fixed , thereby hedging the exposure.

So, one would need to borrow in the money market in Singapore to hedge the exposure in money market hedge.

So, C) Short and Borrow is the correct option