Can anyone explain example 4 to me? If a firm has long exposure to a currency, that means an appreciation in the foreign currency is a good thing. Why does the firm need to hedge the GBP if the HKD/GBP forward rate appreciates? I also don’t understand the ZAR example. Why is depreciation of the foreign currency a bad thing if the firm has a long exposure?
If your domestic currency is GBP, then if the HKD/GBP rate appreciates, you get fewer GBP per HKD.
That’s bad.
If the foreign currency depreciates, you get less of your domestic currency per unit of foreign currency.
That’s bad.
If the HKD/GBP goes up, that means the HKD is appreciating against the GBP. The investment is in HKD so when choosing back to GBP, the investor would receive less? I get really confused about price/base currency and which way the FX rate moves.
It always the base currency that is appreciates/depreciates right?
No . . . it means that the GBP is appreciating againse the HKD: you get more HKD for each GBP.
Remember how CFA Institute writes currency quotes: PC/BC. The GBP is the base currency: the commodity. When the price of a commodity increases, the commodity appreciates.
I know what you mean, and what you mean is correct.
Remember, however, that both currencies are changing. If HKD/GBP increases, you’re correct that GBP appreciates wrt HKD; however, it’s equally correct that HKD _ depreciates _ wrt GBP.
So it’s tree that the base currency appreciates/depreciates. It’s also true that the price currency depreciates/appreciates (respectively).