A money market refers to the financial market in which short-term or liquid instruments such as Treasury bills, commercial paper and banker’s acceptances are traded. Hedging is an investment that reduces the risk of unfavorable price movements in an asset. In a related security, a hedge will take an offsetting position. A money market hedge is a technique for reducing the foreign exchange risk by using the money market. Typically, a money market hedge is best utilized by small businesses looking to reduce currency risk or fluctuations without having to enter into a forward contract or using the futures market. A money market hedge fixes the exchange rate for a future transaction and it can be customized to specific dates and amounts.
An option is a contract that allows the buyer to buy or sell a common stock, or underlying asset, at a specific price on or before a certain date. An option is a security and it is a binding contract with the terms and properties strictly defined. There are two types of options - calls and puts. Calls are comparable to having a long position on a stock. Buyers of calls have an interest in the stock increasing substantially before the option reaches expiration. Puts are similar to having a short position on a stock and the buyers of puts desire that the price of the stock will fall before expiration. A call gives the holder the right to buy an asset at a certain price within a specific time period whereas a put gives the holder the right to sell.
There are four types of participants within an options market: buyer of calls, seller of calls, buyers of puts, and sellers of puts. A buyer, also known as a holder, is said to have a long position, whereas a seller, also known as a writer is said to have a short position.
A money market hedge is a system whereby the rate of a foreign currency deal is used to set the value of the organization's domestic currency. This structure helps the domestic company reduce its risk when doing business with a foreign company or organization. By locking in the value ahead of time (before the transaction), the domestic company is then more secure doing business with foreign organizations in the future. An option hedge is sort of like an insurance policy on an investment, and it may be useful if an investor is concerned that an initial expenditure may not pay off as previously expected. Option hedges differ slightly from insurance policies in that they require the investor to make an investment with the specific intent to offset potential losses on the original purchase. The downside of hedging is the possible loss of profits; the benefit is that the stockholder is protected should a risky transaction go awry.
https://www.nytimes.com/2018/07/12/business/hedge-funds.html
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