ACCA Financial Management (F9) Certification Practice Exam

In the context of a money market hedge for foreign currency payments, once foreign currency is put on deposit, the subsequent action is to repay the loan in home currency.

Here's the reasoning behind this process:

When a company anticipates a future payment in foreign currency, it can borrow that currency now, convert it to its home currency, and invest that home currency, usually in a short-term instrument. By simultaneously depositing the foreign currency which is to be paid later, the company ensures it has the necessary funds right when the payment is due.

After the foreign currency is deposited, the next step is to repay the initial loan taken in the foreign currency. This secures the hedge, as the company will be able to use the deposited foreign currency to make the payment when it is due, effectively negating any exposure to exchange rate fluctuations that could impact the cash flows.

This strategy effectively locks in the exchange rates, making it a prudent choice for managing currency risk associated with future payments.