Company ABC is located in the USA:

1. ABC will need 300,000 Malaysian ringgits in 90 days and wishes to
hedge its exposure.
 Assuming: 90-day US Interest rate        = 4%
           90-day Malaysia interest rate  = 3%
           90-day forward rate of Ringgit = $0.400
           Spot rate for Ringgit          = $0.404 
 - Would ABC be better of using a forward hedge or a money market
hedge?
 - What would be the estimate cost of each type of hedge?
 - How exactly would ABC implement each hedge?
 - Is there anything else ABC should consider in covering their
exposure?

3. ABC will receive 400,000 Pounds in 180 days.
 Assuming: 180-day US Interest rate       = 8%
           180-day UK interest rate       = 9%
           180-day forward rate for Pound = $1.50
           Spot rate for Pound            = $1.48
 - Again, would ABC be better of using a forward hedge or a money
market hedge?
 - What would be the estimate revenue for each type of hedge?
 - Is there anything else ABC should consider in covering this
exposure?

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Clarification of Question by herbet-ga on 03 Sep 2003 16:26 PDT

Is there any additional information I can add?

I'll add a $5 bonus if I can get an answer by the end of the week.

#1

The better choice is the money market hedge because it costs less.

Forward hedge cost: 300,000 ringgit X $.40/ringgit = $120,000

Money market hedge cost: 300,000 ringgit/(1 + 0.03) X $.404 =
$117,669.90

The forward hedge is implemented by entering into an agreement with
another party to exchange currencies at an established rate on a
particular date.  The ability of the counterparty to uphold the
agreement must be considered.

The money market hedge is implemented by purchasing ringgit at the
existing spot rate and investing the ringgit in a ringgit denominated
money market account.  The certainty of receiving the principal and
the expected interest-rate must be considered.

#2

The better choice is the forward hedge because it results in more
revenue.

Forward hedge revenue: £400,000 X $1.50/£ = $600,000

Money market hedge: $1.48/£ X £400,000 (1 + 0.08)/(1 + 0.09) =
$586,568.81

As in the first case, the ability of the counterparty to uphold the
forward agreement must be considered, along with the ability to
receive the principal and the expected interest-rate on the money
market account.

Sincerely,

Wonko

Sources:

http://www.kdischool.ac.kr/faculty/resume/data/feb01.pdf "Management
under Foreign Exchange Exposure" by Woochan Kim, February 2001

http://pages.stern.nyu.edu/~igiddy/gfm4.pdf "Forwards, Futures and
Money Market Hedging" by Prof. Ian Giddy,
New York University

Search terms: "foreign exchange" hedge money market

Answer came a bit late for me, but matched my calculations.

Thanks!