Hedge and Derivatives in the Money Market Research Paper

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Running Head: Money market hedge and derivatives Money market hedge and derivatives 3Money Market Hedge and DerivativesIntroductionA money market hedge is a boundary that protects against the possible exposure to the risks associated with foreign currency; the hedge is created through depositing or borrowing sums of capital to cater for the settlement of regular bills or receipts incurred in domestic currency. Money market hedge generally aims to protect one from possible financial loss or any other adverse circumstances in a business enterprise; for example, a business that is frequently involved in exchange and transaction of foreign currency is likely to experience losses whenever the value of the currency changes between the dates of transaction and payment dates due to delay.Foreign exchange marketThe foreign exchange market is an online marketing platform that allows individuals to deal in buying and selling foreign currencies; it is also referred to as the forex market. It is approximated that 6.4 million dollars are transacted in one day by traders under this marketing platform.The exchange program involves the establishment of a binding contract in which two parties are involved in the trading, three types of traders are involved in the currency exchange process; the price at the time of the exchange is referred to as spot market, the forward market refers to the binding agreement under which the trading exchange is to be done at a specific agreed price. The trading process usually involves traders who interchangeably buy and sell to each other in a swap method (Pilbeam & K.,2019). Dealers are often obligated to buy the currencies on the spot market with an expectation to sell when the price has fallen or standardized; this way, they spread the risk of incurring loss in whichever price they sell the currencies in the future.OrganizationThe foreign exchange market is comprised of two tiers, that is; the interbank market in which different large banks are directly involved in the exchange of foreign currency with each other, this tier normally has a few numbers of members involved, over-the-counter in which different companies and individual traders are involved in the selling and buying of foreign currencies, this is the most popular mode of foreign exchange mode as it has many companies that are integrated and involved in the online money exchange platform.Interbank marketDifferent banks are involved in creating a favorable network and a reputable platform to trade in currency exchange legitimately; this tier has the advantage of stabilization and standardization of the exchange rates worldwide. The banks involved in this trading platform aim to make profits satisfactory to them and their clients at large. The groups targeted by the banks include the rich individuals, the governments, and the expanded parastatals and corporations (Pilbeam & K.,2019).Amongst the renowned banks involved in the online currency exchange are JP Morgan Chase, BS, XTX Markets, Standard Chartered, HSBC, Citi, Bank of America.The central banks are not commonly involved in trading currencies; nevertheless, they significantly impact the online currency exchange trade.

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A greater sum of capital belongs to the central banks within the exchange stocks.Retail marketThis level of currency trade market involves small agents buying and selling foreign capital. However, the number of traders involved is many compared to that of the interbank; the overall currency traded is less and doesn’t directly impact the currency exchange rates.Wholesale tierAn informal and geographically dispersed network in which banks…

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…Hedging is usually significant in a contract to protect against unfavorable changes in the assets and liabilities’ worth (Vo et al.,2020). At the same time, speculation generally derives profit from foretelling the expected changes in the market of a particular commodity.The global derivatives marketplace is based in Chicago and is located in the 20s, commonly known as The Chicago mercantile Exchange, founded in 1898 initially to agricultural market commodities.Money market hedgeThis refers to a commonly used technique by foreign currency exchange companies to lock in the worth of the foreign currency transaction; it entirely involves the deposition of money into a money market while simultaneously reducing the risk of exchange rates. This tool is significant in protecting the foreign currency dealers who are the companies from the risk of fluctuations in the forex exchange rates that could preferentially alter the transaction’s price. Hedging aims to protect investors from financial risks and possible losses (Fagetan et al.,2021).Money marketing hedge is most appropriate in a scenario where forward contracts are not readily available such as the currency type that is not commonly and widely traded, used by the small-scale business enterprises that do not sufficiently have good access to the forward currency market and as an option in which an individual requires a foreign currency hedge but is unlikely to explore future currency options.+=107692.3077Accounting for the varying interest rates,(107692.3077) x (5.75-5.62) =Y 14000=Y 35000This is compared to the current value of 88,000 Japanese yen; therefore, this is a case of market loss.Money market hedge is a derivative; it involves a contract that aims to reduce the expected forex exchange risks due to fluctuation in the exchange rates; the risks are minimized through hedging,….....

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