Currency hedging - counter intutive explaination

‘When you hedge the currency risk (risk of FC decreasing), you sell the FC currency forward and therefore “pay” the FC interest rate (or borrowing at the FC rate) while earning the DC interest rate.’ I don’t quite understand why the FC forward seller “borrows” at FC rate. Can you please elaborate it?

when you sell FC Currency forward – you are borrowing the FC today and selling it in the future at a price and expecting the currency value to go down. (The value is expected to go down in the future so if you sold it at the future set price, you gain). since you are borrowing fc today - you are borrowing at the fc rate - and you need to pay that rate.

Because the only way to sell a currency fwd is to borrow it and pay the rate of that currency/country.

Got it. Thanks.

It is simple carry trade in FX . From the perspective of the Domestic trader: Sell forward FC , so you have a delivery commitment for FC for a future period. 1.You borrow FC , convert to DC at the spot , pay the FC interest rate on borrowed FC. 2. Invest DC . Earn the DC interest rate on invested amount. 3. At the expiry of the forward , convert enough DC (DC now higher because of interest accumulated ) to FC at the then spot (lower spot, but more DC to convert ) and use the FC to deliver on the forward. Since FC has fallen over the period , the trade will work , if the market expected fall was less than your expectation i.e. the realized fall in spot is worse than market was projecting. The no-arb case would be earning on the spot differential = loss on the interest rate differential , leaving neither party at a loss.