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  3. 4. (a) you have a long open position, that is, you

4. (a) You have a long open position, that is, you are expecting a future...

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Finance

4. (a) You have a long open position, that is, you are expecting a future foreign currency inflow. Under what conditions would you be indifferent between hedging this position via a forward transaction and hedging it via the money markets if the position is a foreign-currency accounts receivable that you would like to finance? In other words, assume that you would like to borrow now against the expected proceeds of the accounts receivable inflow (sell forward and borrow against proceeds in domestic currency, versus borrow foreign currency and sell the proceeds in the spot market, etc.). (40 marks)

(b) Explain briefly how variable collateral and periodic re-contracting can be used to reduce default risk in forward markets. (20 marks)

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