FREE online courses on Investment Decisions in Exchange Rates - Hedging an Account Receivable

 

The most simple procedure for hedging an account receivable is to simply to sell the receivable in the forward market at a price of F$/F per unit of foreign currency.  The present value of this strategy is simply the left hand side of the expression above

 

                   F$/F  .

 

Alternatively, we could borrow an amount equal to the present value (discounted at the interest rate in the foreign country) of the account receivable, .  The current dollar value of the proceeds of the loan is represented by the right hand of the above expression,

 

                   S$/F  .

 

When the loan comes due, the liability can be repaid using the proceeds from collection of the account receivable.