In the CFAI text, Reading 71, page 43 there is an example on Microsoft. I’m not sure I understand it. It says that Microsoft expects to receive 12mn euros in 3 months from an European subsidiary, which it will convert to dollars on receipt. Thus, Microsoft is essentially LONG EUROS and SHORT DOLLARS.(this line doesnt make sense to me) and to offset this it has to enter into a forward contract to SHORT EUROS and LONG DOLLARS. How is the original position LONG EUROS and SHORT DOLLARS? Appreciate anyone’s help. Thanks
Because they are effectively holding €12m for the next 3 months. Sometimes an easy way to clear up which way round long and short are is to think “If I was in Microsoft’s postition, would I wan’t the euro to go up or down?”. Clearly before the hedge, you’d want the euro to strengthen so you would get more dollars in three months. So you’d be long euros.
to receive Euros - Microsoft has to Sell , buy Euro. So it is Short , Long Euro.