Hi,
In the CFAI book they explain that if you are long and the currency appreciates, then you get a cash inflow. If you are long and the currency depreciates you get a cash outflow. If you are initially short and the currency appreciates you get a cash outflow and if it depreciates an inflow. However, in one of the EOC question, a short position leads to a cash inflow when the currency appreciates.
The forward rate is 0.7400 (GPB/EUR) (9 months), we are short euro and 6 months later we want to close the position, but when we buy the euro, the 3 month all in offer is actually lower than the initial 9 month forward price (say 0.7390). So a short position and an appreciation actually lead to an inflow. This makes sense mathematically, but does it make sense in practice? Would a 3 month forward all in rate 6 months from now always be higher than 9 month forward all in rate quoted 6 months ago?
thanks!