How do you define who has a long position and who has a short position in a forward rate currency contract? I mean if I wish to exchange Euros for US dollars at some time in the future and enter into a contract to lock in the exchange rate, am I selling Euros for USD(ie. short) or buying USD with Euros (ie. long)?
In this position, since you are selling Euros, you are short Euros. And you are buying USD, so you are long USD.
Don’t confuse the Spot currency trading with the Forward currency trading which is mostly done for hedging/speculation. Logically in spot currency trading one is actually buying a currency and selling a currency at the same time. So a trade in USD/EUR means buying EUR and selling USD at same time. Think of a example where you want to convert your local currency into the destination currency for a holiday trip. You are actually selling your local currency to buy destination currency. But there has to a long and short positions in any trade. So, is the case with the Currency forwards which are generally used for speculation/hedging. Lets take an example: An European firm wants to import goods from US in next month. The goods are worth 10000 USD at today’s price and the current EUR/USD is 1.5, so if the European firm buy today it needs to shell = 10000/1.5 = 6667 Euro (approx). But as the transaction is in future and the European firm may have to pay more EUR, if the EUR/USD rates fall below 1.5, so in order to minimize this downside risk, firm can hedge this by taking short position on EUR/USD forward contract. So now if the EUR/USD price falls, firm will be receive cash from currency forward trade (as they are in short position) which will offset their loss, the firm will occur in importing goods. The other side of the trade i.e. Long position can be a speculator who thinks the EUR/USD will rise and can earn profit from this transaction Hope this clears your doubt …