Something that was so simple is now confusing the F*CK out of me: When heding with currency futures say I am a US company and I have a boatload of Euros that I want to convert to USD in 3 months. I want to hedge the currency risk here. 1) @ t = 3 which currency am I wanting to “sell” and which am I “buying” ? 2) What futures position hedges this: “Long” / “Short” ? 3) What way does the currency exchange rate need to move in order to hurt me / help me. Alternatively, who holds the credit risk if the exchange rate goes up / goes down. I know this stuff is pretty simple, but my brain is to the point where i don’t even know if i remember how to tie my shoes it so filled with new CFA sh!t Thanks!
You are selling Euros for USD. You will want to go short euros in the futures market. You can buy a euro put option or buy a dollar call option to do this if you want to use options rather than futures/forwards. If the rate goes up, as in euro/usd moves from 1.25 to 1.5, your hedge should kick in and you will be locked in at whatever you hedged at and you would hold the credit risk. If the rate goes down it would be best to not be hedged since the euro is improving. If you used futures/forwards the hedge would kick in for your counterparty and you would be stuck paying, as in the counterparty would hold the credit risk. Make sense?
Sanity Check: I am short Euros futures meaning that at t=3 I will sell my Euros for a pretermined number of USD. If the rate moves up (i.e., it takes more Euros to buy 1 UDS) in the spot market, but I am locked in at my futures rate, the other guy is getting the short end of the stick because if he wasn’t in the futures contract with me he could go out and get more Euros per his 1 USD. Since he is on the losing end, he creates credit risk for me. Correct?
you basically have a lot of euros that you want to get out of… so you want to sell euros and buy dollars. so the futures position will be short euro (so that you lock in a fixed selling price for euros). WITHOUT the futures, if USD falls, you gain as you will get mores dollars now in return for euro. WITH THE FUTURES (shorting euros at say 1.2 euro per dollar) @t=3, you will convert your euros at the fixed futures price of say 1.2 euro per dollar. >> if USD falls, to say 1.1 E/ ( falls means E rises - E rises means u get less Es for $s), you will be hurt because you will be paying higher as per the fixed rate futures contract.
CF_AHHHHHHHHH Wrote: ------------------------------------------------------- > Sanity Check: > > I am short Euros futures meaning that at t=3 I > will sell my Euros for a pretermined number of > USD. If the rate moves up (i.e., it takes more > Euros to buy 1 UDS) in the spot market, but I am > locked in at my futures rate, the other guy is > getting the short end of the stick because if he > wasn’t in the futures contract with me he could go > out and get more Euros per his 1 USD. Since he is > on the losing end, he creates credit risk for me. > > Correct? Correct. He gets F’d and you hold the credit risk.
- you will receive Eur in 3months, so you are LONG Eur…will need to sell it for USD when you get it. 2) B/c you are LONG Eur, you will SELL Eur forward at a predetermined rate ($x/Eur) 3) if Eur depreciates - ie ($x/Eur) goes down, you are golden, u locked in a better rate if Eur appreciates - ie (x/Eur) goes up, no benefit here as you locked in the forward premium/discount In theory, the change in FX rate doesnt really help you or hurt you because you locked it down for a reason, which is to avoid uncertainty. If you want to preserve upside (from Eur appreciating), you would long a dollar call at EurX/.
Basically, this is what’s happening in reality… You have Euros you want to get rid of and exchange them into USD. You think that Euros will depreciate against dollar, so you hedge using futures. 1. You own 10 million euros => you are long euro currency 2. To hedge, do reverse: Short forward euros at current ex rate. 3. Current ExRate = 1.5 USD/EUR at time T: 1. ExRate = 1.75 USD/EUR 2. If you did not hedge your position, you would have the following transaction: give 10million euros to the exchange broker and receive 1.75*10M = $17.5 million 3. Since you hedged, deliver 10m euros and receive 10m*1.5 = $15 million It looks like you are worse off, since you received less than if you did not hedge your position. Now let’s say you file for bankruptcy at the expiration date. This means, you wouldn’t have euros to deliver on the forward contract. You would need to buy euros at 1.75 usd/eur and deliver them at 1.5 to your counterparty, or simply pay the difference. Thus, your counterparty bears the risk that you are not able to deliver that difference. Hence, he/she bears the credit risk.