Question

Money market hedge can be used to hedge a firm’s translation exposure to exchange rate
risk. Is this statement true or false? Why?

Answer 1

Yes

• Translation exposure is the risk that company's equity's, asset's, liabilities or income in a foreign currency. It is also known as accounting exposure.
• On the other hand money market hedge may be defined as tool used by the domestic companies to reduce currency risk that happen when conducting business transaction with foreign companies .
• Examples for this commercial papers .
• By this money market hedge domestic companies enter with business transaction with foreign companies with such term and condition that consideration to be settled at future date at certain agreed foreign exchange rate .in future, foreign currency value may increase or decrease. but companies can settle consideration At previously agreed foreign exchange rate, there by companies can reduce risk of foreign currency exchange .
• There by exchange rate fluctuations can be dramatically reduce by money market hedging.