What is a disadvantage of a money market hedge?

A money market hedge involves using the money markets to hedge against fluctuations in exchange rates, typically involving borrowing and investing in different currencies. One of the disadvantages of this approach is that it can result in excessive use of credit lines. This situation arises because, to execute the hedge, a company may need to borrow funds in one currency and simultaneously invest in another, which can lead to increased reliance on credit facilities.

Using a money market hedge can require substantial capital, and if the company is in a position where it frequently borrows to manage currency risk, it can strain its credit lines and increase its financial risk. This reliance can become problematic if market conditions change or if there are adverse currency movements, potentially leading to liquidity issues. Thus, this option accurately highlights a significant drawback of employing a money market hedge strategy.