Currency Hedging Clarification

A little confused as to why you would want to fully hedge your currency exposure if you have high short term income/liquidity needs. Any clarification would be appreciated.

If you have short-term income/liquidity needs, you likely want to ensure that your cash flows don’t change (more specifically, that your cash inflows don’t decrease). If you buy AUD 10 million par of Aussie government bonds paying a coupon rate of 2%, and you can lock in an exchange rate of GBP/AUD 0.5736, they you’re guaranteed semiannual payments of GBP 57,360.

With anything other than a 100% hedge, those payments could be less.

Duh! Couldn’t connect the dots but super simple. Thank you!

My pleasure.