Since some of you did such a great job answering my currency swap question. I was wondering if you might be able to answer a question that I had about forward currency contracts. What I am confused about is what really defines a short or long position in the currency contract. I mean in most forward contracts, a buyer/seller will be obliged to exchange money for a commodity, financial asset, etc. Whereas, with a currency forward the buyer/seller is trading one currency for another. For example, if I enter a forward contract to sell Euros for USD, then I would view that as being short Euros and long USD. However, I have came across some questions that asked if such positions were short positions or long positions and I am confused as to what defines if I am short or long the contract (selling Euros or buying USD). Does it have something to do with what is considered the home currency? I remeber something from my international finance class where my prof said that you can’t buy “money” and think that his plays a role in my confusion. Thanks.
In a Currency Forward contract, unlike other contracts, you cannot say if you are ‘long’ or ‘short’ the Contract itself. If ‘long’ or ‘short’ is somehow used at the Contract level, then it MUST also specify ‘long’ or ‘short’ Currency. Example: I am ‘long’ a Currency Forward Contract in USD against EUR. Meaning, I have entered a Currency Forward Contract buying USD and selling EUR. Your professor was correct, when he said you cannot buy ‘money’. But you can buy a ‘currency’. ‘Currency’ is a commodity, but ‘Money’ is not. Infact, Currency Market is the biggest Commodity Market in the world, amongst all other commodities. Average DAILY volume in Currency Markets is over 1 trillion USD. In economics, ‘Money’ and ‘Currency’ are two different things. Hope it helps.
The way I understand Currency forward is this… Suppose 1 Euro = 1.5 USD And if u enter into a currency forward contract of say Buying euro and sell USD Think of the Euro currency as “Shares of a company” you are getting it for 1.5 USD and n the settlement date if 1 Euro = 1.75 USD, the counterparty will pay u the 0.25$ in Euros This might not be the best way, but it does help me!!
You can think of exchange rates as the price of the currency in the denominator. If the $/GBP exchange rate rises, the price of pound has risen = Appreciation of the pound and depreciation of the dollar.
beatthecfa Wrote: ------------------------------------------------------- > You can think of exchange rates as the price of > the currency in the denominator. If the $/GBP > exchange rate rises, the price of pound has risen > = Appreciation of the pound and depreciation of > the dollar. I always see quoted stating something like “USD/SGD 1.38”. It means 1 USD can exchange for 1.38 SGD. I also notice different economics text states different convention. Why can’t they standardise?