DEFINITION of 'Money Market Hedge '

A money market hedge helps a domestic company reduce its currency risk when doing business with a foreign company. It allows the domestic company to lock in the value of its partner’s currency (in the domestic company’s currency) in advance of an anticipated transaction. This creates certainty about how much a future transaction will cost and ensures the domestic company can lock in a price that it is willing and able to pay.

BREAKING DOWN 'Money Market Hedge '

Without a money market hedge, the domestic company would be subject to exchange-rate fluctuations that could dramatically alter the transaction’s price.  While exchange-rate fluctuations could cause the transaction to become less expensive, they could also make it more expensive and possibly cost-prohibitive.

For example, if an American company knows that it will need to purchase supplies from a Spanish company in six months, for which it will have to pay in euros rather than dollars, it could use a money market hedge to lock in the value of the euro relative to the dollar today so that even if the dollar weakens relative to the euro in six months, the U.S. company will still be able to purchase its supplies from Spain at the original rate.

If the U.S. company did not want to use a money market hedge, it could also use a forward contract, use an FX swap or simply take a chance and pay whatever the exchange rate happens to be in six months.

 

RELATED TERMS
  1. Accounting Currency

    The monetary unit used when recording transactions in a company's ...
  2. Section 988

    A financial transaction involving a capital loss or gain on an ...
  3. Forex Hedge

    A transaction implemented by a forex trader to protect an existing ...
  4. Unsterilized Foreign Exchange Intervention

    An attempt by a country's monetary authorities to influence exchange ...
  5. Buying Hedge

    A transaction that commodities investors undertake to hedge against ...
  6. Forward Discount

    In a foreign exchange situation where the domestic current spot ...
Related Articles
  1. Investing

    4 Reasons Currency Hedging is Important

    Learn how currency hedging can help reduce exchange rate risk for a portfolio of foreign stocks. Consider the cost of hedging and its potential benefits.
  2. Trading

    Hedging With Currency Swaps

    The wrong currency movement can crush positive portfolio returns. Find out how to hedge against it.
  3. Trading

    How To Avoid Exchange Rate Risk

    What are the best strategies to avoid exchange rate risk when trading?
  4. Investing

    Looking to Hedge on Currency Volatility? Consider...

    In an attempt to dampen down the impact of the stronger dollar, investors have been turning to currency hedged exchange traded funds (ETFs) in a big way.
  5. Investing

    To Hedge Or Not To Hedge - That Is The Question

    The exploration and production industry lock in the price of its product to lower the volatility of earnings.
  6. Investing

    Explaining Foreign Exchange Risk

    Foreign exchange risk is the chance that an investment’s value will decrease due to changes in currency exchange rates.
  7. Investing

    Explaining Interest Rate Parity

    Interest rate parity exists when the expected nominal rates are the same for both domestic and foreign assets.
  8. Trading

    What Happens in a Currency Crisis?

    A currency crisis comes from a decline in the value of a country’s currency.
  9. Trading

    Understand the Indirect Effects of Exchange Rates

    Exchange rates have a tremendous influence on the economy. Exchange rates can indirectly affect many of the most important aspects of our lives.
  10. Investing

    3 Strategies to Mitigate Currency Risk (EUFX)

    Discover the often overlooked risk known as currency risk, and learn three strategies to mitigate or eliminate it in your portfolio.
RELATED FAQS
  1. What types of companies benefit from reporting results utilizing constant currencies ...

    Understand constant currency figures, and explore some of the reasons why a company is likely to benefit from reporting using ... Read Answer >>
  2. How are futures used to hedge a position?

    Futures contracts are one of the most common derivatives used to hedge risk. A futures contract is as an arrangement between ... Read Answer >>
  3. What happens if you don't hedge your investments?

    Learn the purpose, advantages and disadvantages of hedging, and find out how to utilize hedging to enhance an overall investment ... Read Answer >>
  4. How are international exchange rates set?

    International currency exchange rates display how much one unit of a currency can be exchanged for another currency. Currency ... Read Answer >>
Hot Definitions
  1. Trickle-Down Theory

    An economic idea which states that decreasing marginal and capital gains tax rates - especially for corporations, investors ...
  2. North American Free Trade Agreement - NAFTA

    A regulation implemented on Jan. 1, 1994, that eventually eliminated tariffs to encourage economic activity between the United ...
  3. Agency Theory

    A supposition that explains the relationship between principals and agents in business. Agency theory is concerned with resolving ...
  4. Treasury Bill - T-Bill

    A short-term debt obligation backed by the U.S. government with a maturity of less than one year. T-bills are sold in denominations ...
  5. Index

    A statistical measure of change in an economy or a securities market. In the case of financial markets, an index is a hypothetical ...
  6. Return on Market Value of Equity - ROME

    Return on market value of equity (ROME) is a comparative measure typically used by analysts to identify companies that generate ...
Trading Center