If im expecting to receive EUR 1million in 1 year and i want to hedge my position as a US investor. Forward rate quoted as 1.2 USD/EUR. Do i long the USD/EUR or Short USD/EUR? An explanation please>
you will be receiving less money if the USD/EUR increases (i.e. from 1.2 it goes to 1.5), so you want to protect yourself against that happening by going long the USD/EUR forward, which will gain in value when the USD/EUR rate increases.
Sorry mate. I think you are wrong. Since I have EUR i want the exchange rate to go up and convert my EUR to USD at higher rate. Therefore i would short the USD/EUR forward. Could someone agree with me??
Wouldn’t shorting the USD/EUR forward fix a stated forward rate at which you would have to deliver the euros?
SPOT ON.
When considering whether to long or short, focus on the denominator in the currency pair. Receiving Euros and wanna hedge? Sell the USD/EUR or buy a put to protect against a depreciating EUR. It’s also worth noting when considering options, if you’re buying a put on the EUR, it’s the same as buying a call on the USD in this case.
Do your best to nail this down or it’ll drive you nuts at L3!
ah crap didn’t RTFQ. didn’t realize i had to look at it from the viewpoint of a US investor. in that case u will benefit from a depreciating EUR, so you want to protect yourself from EUR appreciating, so you will go short the USD/EUR.
Thanks mate. Good explanation!
If I’m a US investor receiving 1 million Euros in a year’s time, wouldn’t I want to protect myself from the Euro DEPRECIATING? Hence, we’d go SHORT on the USD/EUR???
sorry. i’m just going to stop commenting after this, i’m **** at currency forwards, so i shouldn’t be giving answers in the first place. you’re right, you want to protect urself from eur depreciating, since a depreciating euro would convert to fewer USD which is bad for you. so to protect from that you would want to go into a contract that would benefit when the USD/EUR rates went DOWN, hence go short the USD/EUR.
god i hope i’m right this time.
^yes, because you’ll receive less dollars with your newly negative-deposit-yielding euros if you do not sell euros.
You’ll sell euro forward, stay long dollars. When expiration comes, you deliver the cheaper euro to whoever was long by buying euros in the spot market at a now lower rate.
At least that’s how i see it!
You want a position in a forward that will have you paying EUR and receiving USD.
In the language of forwards, you generally refer to the base currency, so you would be long an EUR/USD forward or short a USD/EUR forward.