When is your exam? I can explain you because I did it myself creating an example of two different currencies.
Money market hedge is very simple, Either a company has excess cash and it will invest in the country where it gets higher interest rate usually the the country in which the country has payable, Or when company has to borrow fund and invest in the higher earning interest country.
Ex: US Company has payable of 800,000 pesos to a Mexican supplier in 180 days . The dollar rate is .10 per pesos. The Mexican interest rate is 20% annually. US company has excess cash of $100,000.
Now if you think in real life you have idle cash of $100000, won't you invest it and when the payable comes due you will keep the interest earned and pay the payable amount. This is called money market hedge.
Sol: 800,000 pesos x .10 = $80000 payable in 180 days. Invest pesos in Mexico @ Mexican rate. 800,000 / 1+(20%/2) = 727273 pesos x .10 = $72727 dollars actually payable. Pay attention to the duration payable and divide the annual interest rate accordingly.
Us company has to pay only $72727 instead of $80,000.
EX: when US company has to borrow funds (No excess cash).
US company has payable of 800,000 pesos to Mexican supplier in 180 days. Dollar rate to peso is .10 per pesos. Mexican Interest rate is 20% annually and US interest rate is 5%. US company has no excess cash.
Sol: In this case US company will borrow $72727 for 180 days(from 1st solution) in US @ 5% annually i.e. 5%/2 (180 /360) =2.5%. $72727 x 1.025 = $74545. US company still in benefit even after borrowing funds. US company has payable now of $74545 instead of $80,000.
Reverse the situation with receivable now instead of investing in Mexico, US company will borrow the same amount if US company cannot wait for the receivable to receive for 180 days.
I hope this will be helpful. I have to go run some errands, will come back with futures contract.
.