58h: currency forwards, which way does the payment go?

CFA Level I Derivatives
#1

So in one example, the investor (myself) wants to use a currency forward contract so that I receive 50,000,000 EUROS in 3 months. Assume

  • _Today, the exchange rate is 1.23 USD for 1 euro, so 50,000,000 euros costs $ 61,500,000 _
  • _3 months from today, the exchange rate becomes 1.25 USD for 1 euro, so 50M euros will cost $62,500,000 _

_1. First off, am I conside_red the long or short on this contract? Or does that terminology only apply when you’re exchanging currency for non-currency assets?

  1. Am I supposed to lose $1 million or gain $1 million in profit?

My initial reaction was that I am entitled to a$1,000,000 profit because the euros I’m receiving are worth more. Then I started thinking that I owe the counterparty $1,000,000 because the Euros cost more. Which is it?

#2

  1. You are long euro and short dollars.

  2. That’s not clear. I’m not sure whether you mean that today’s spot rate is USD1.23/EUR and today’s 3-month forward rate is USD1.25/EUR, or today’s 3-month forward rate is USD1.23/EUR and in three months the spot rate will be USD1.25/EUR, or today’s spot rate is USD1.23/EUR and in three months the spot rate will be USD1.25/EUR. The answer depends on which of those (or, perhaps, something else) you mean.