Contract Agreement Position Action Receive FC Long Sell FC fwd Pay FC Short Buy FC fwd Can anyone help me on memorizing the wordings? Are they in the position of longing the FC when the contract agreement is “to be receive FC”? Then how is a long position connected to selling a FC forward? Many thanks!
You must be on that section that talks about importer/exporter. And they are trying to use different hedge to protect their exposure. Try this: When you are in a position to deliver the FC, you are shorting the currency. What is the opposite side of that trade? Long the currency, therefore, the create the hedge, you need to go long on the FC future (forward) When you are in a positon to receive the FC, you are long the currency. What is the opposite side of that trade? Short the currency, therefore, to create the heade, you need to go short on the FC future (forward) Don’t memorize, try to understand. Always ask youself “What happen if the asset value moves in the other direction?” The other direction is your hedge. Helps?
Thanks WS - you explained this very well to me. What i’m hung up on still is that I don’t know when to hedge and when to not. Can you explain when it is advantageous? Perhaps with an example? I still don’t 100% understand from Schweser. Thanks,
According to my reading in CFAI and Schweser If you are in the business of taking risk and you have sufficient information that will allow you to make an “informed” and “intelligent” (I am sure Bear people will say their decision was informed as well) decision, you shouldn’t hedge. Example, you are a currency trader, that means, you study and deal with the risk factors that affect currency value everyday, and I would assume that you should have enough information to have an educated opinion about your currency position. In this case, you should take the risk that you are comfortable with. However, if your primary business activies is not taking risk, then you should hedge. Here is an example. Let’s say you are a farmer. Your primary knowledge is to grow and sell your farm products. You are good at farmering, not good at understanding the risk factors. Therefore, you should hedge. Bottom line…focuse on your primary business activity. Hedge away the risk you are not familary with. That can bring up another interesting topic===>risk identification.
Klein…there is lot of places in the LIII talks about hedge or not hedge. Which context are you talking about. The above explanation was given in the context of risk managment in general. Was that the answer you were looking for? There is another section in bond section that talks about hedge or not the hedge, that has more to do with the market expection of currency and manager’s expection of currency valuation.
thanks WS. I love how you called me Kleine. =) I’m just weak on hedging concepts in general: interest rates, currency, etc.
try this with currency. think of the cash flows. do you have to buy something from another country in three months? buying means you give them money, so you are short (-)! the currnecy, so you want to go long or agree to buy the country’s money in three months which is a positive cash flow (+). the + and - cancel each other out and you’re hedged.
kleine Wrote: ------------------------------------------------------- > thanks WS. I love how you called me Kleine. =) > > I’m just weak on hedging concepts in general: > interest rates, currency, etc. Oh, did I misspell your name in my previous post…sorry about that.
ws Wrote: ------------------------------------------------------- > (I am sure > Bear people will say their decision was informed > as well) I would really ike to hear about that. I hope someone is writing a good book on it…
LOL…100% informed is informed; 1% informed is also informed. On what scale of informed are you to be qualifed as INFORMED???
Thanks ws. your explanation is extremely helpful!