Forward-deciding long/short

CFA Level III Derivatives
#1

FinQuiz Item-set ID: 8798 Questions 13(8799) through 18(8804) relate to Reading 29

A U.S. company that purchases raw material from Britain to maintain the quality of its products. On 5th June, Superior Goods planned to purchase raw material worth ₤50 million from a company in London. The payment has to be made on 5th July and the current exchange rate is $1.341/₤. A forward contract denominated in dollars/₤ has a one month forward rate of $1.355/₤.

Question: To hedge the foreign currency risk, Superior Goods should most likely go:

Answer: long the forward contract

Reason: Since Superior Goods Inc. has to deliver the foreign currency for the planned purchase, it is short the pound, and therefore, to hedge the exchange rate risk, it should go long the forward contract.

My understanding: When I have to deliver on a forward contract (relating to the base currency-denominator), I think I am holding short position.

How can we determine whether I should say it long or short.

Correct me please, and help me understand.

Thank you

#2

your understanding is correct, it is short, so to hedge it will go long , buy base currency here

#3

long the forward contract = buy base currency paying in price currency

short the forward contract = sell base currency and receive price currency

#4

Long/short depends on how the exchange rate is quoted: if you’re receiving AUD and paying GBP, then you’re long if the rate is quoted as GBP/AUD, and short if it’s quoted as AUD/GBP.