Hi,
I am a bit confused about how to hedge foreign A against its currency exposure.
Let’s say I am a USD investor investing in a EUR Assets.
Alt 1) I go long the EUR Asset, I now also have a long EUR exposure and I hedge this by selling the EUR short forward.
Alt 2) I go short the EUR Asset. My intuitive reasoning is that this is opposite to alternative 1, and I am now short the EUR. But from looking at the example in Reading 17, section 6.1.1 “EXECUTING A HEDGE” it seems to be the case, there they have a short JPY position and hedge it by selling the JPY short.
My question is, do I still have a long EUR exposure even in alternative 2?
Thanks for the help!
If you read the example carefully, you’ll see that they have a short JPY position in the JPY/HKD forward contract, not a short JPY position in the investment they’re hedging. In fact, we can infer that they have a long JPY position in the investment that they’re hedging. Why? Because they’re delivering JPY and receiving HKD on the forward contract: their underlying investment will deliver JPY to them, but they want HKD, so they entered into the forward contract to deliver the JPY that they don’t want and to receive the HKD that they do want.
Ahh, Thanks for clarifying - that makes sense.
If I actually was short a JPY Asset I believe it is correct to say I have short JPY exposure which could be hedged with a JPY long forward?
