Money Market Hedge


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.


  1. Accepting Risk

    A risk management method used in the business or investment field. ...
  2. Inflation Hedge

    An investment that is considered to provide protection against ...
  3. Double Hedging

    Hedging a position by using futures and options, thereby doubling ...
  4. Cover

    The act of completing an offsetting transaction so as to eliminate ...
  5. Average Price Put

    A type of option where the payoff depends on the difference between ...
  6. Hedge

    Making an investment to reduce the risk of adverse price movements ...
Related Articles
  1. Mutual Funds & ETFs

    Hedging With ETFs: A Cost-Effective Alternative

    The benefits of ETFs for hedging are clear and investors of all sizes are taking notice.
  2. Options & Futures

    Practical And Affordable Hedging Strategies

    Learn how to find and use the most cost-effective ways to transfer risk.
  3. Options & Futures

    Are Derivatives Safe For Retail Investors?

    These vehicles have gotten a bad rap in the press. Find out whether they deserve it.
  4. Mutual Funds & ETFs

    The VIX: Using The "Uncertainty Index" For Profit And Hedging

    Learn the best ways to profit and hedge using the Chicago Board Options Exchange Market Volatility Index.
  5. Forex Education

    Hedging With Currency Swaps

    The wrong currency movement can crush positive portfolio returns. Find out how to hedge against it.
  6. Options & Futures

    Getting To Know The Money Market

    If you need liquidity and safety on a sum of money, don't forgo potential interest by keeping the funds as cash.
  7. Markets

    Hedging With Puts And Calls

    This trading strategy can reduce your risk - but only if you use it effectively.
  8. Options & Futures

    Find Profits By Hedging Iron Condors

    Hedging iron condors with put calendars can help control losses, and can even make an investor more profitable.
  9. Options & Futures

    Immunization Inoculates Against Interest Rate Risk

    Big-money investors can hedge against bond portfolio losses caused by rate fluctuations.
  10. Options & Futures

    Does It Still Pay To Invest In Gold?

    This asset's appeal dates back thousands of years. Find out whether it can live up to the hype.
  1. Can your car insurance company check your driving record?

    While your auto insurance company cannot pull your full motor vehicle report, or MVR, it does pull a record summary that ... Read Full Answer >>
  2. Is my IRA/Roth IRA FDIC-Insured?

    The Federal Deposit Insurance Corporation, or FDIC, is a government-run agency that provides protection against losses if ... Read Full Answer >>
  3. How is the value of a pip determined?

    A pip in foreign exchange trading is a measure of a price movement in a currency pair. "Pip" is an acronym for price interest ... Read Full Answer >>
  4. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  5. Why do companies enter into futures contracts?

    Different types of companies may enter into futures contracts for different purposes. The most common reason is to hedge ... Read Full Answer >>
  6. How can I hedge my portfolio to protect from a decline in the food and beverage sector?

    The food and beverage sector exhibits greater volatility than the broader market and tends to suffer larger-than-average ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  2. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  3. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
  4. Cost Of Funds

    The interest rate paid by financial institutions for the funds that they deploy in their business. The cost of funds is one ...
  5. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
  6. Capitalized Cost

    An expense that is added to the cost basis of a fixed asset on a company's balance sheet. Capitalized Costs are incurred ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!