Something that seems minor, but has lead me astray in practice questions; You’re long a foreign currency if you expect to receive it in the future. To hedge it, the books say short a forward contract where you deliver the foreign and receive domestic. Fine. But why can’t I long a forward contract that does the exact same thing? Similarly, book says to long a forward contract if I I’m short the foreign currency (but apparently I can’t short the forward). Am I over-thinking this? Is there a simple convention I’m just not aware of?
Where in the book does it say you can’t long/short a forward that does the same thing? Like you said, it’s the same thing, just flipping the convention used in the forward. If I’m short a forward where I deliver foreign and receive domestic, that’s the same thing as me being long a forward where I receive a domestic and deliver foreign.
Schweser Book 4 page 160, figure 2 (I’ve seen it somewhere else too, but don’t have the location off the top of my head)
You are a canadian investor investing in US assets.
Assume you just sold all your US holdings. now what you have in your investment account is all US dollar. You would want to convert it to Can$
Sell US$ and get Can$ in the Forex market sometime next month.
What if US$ suddenly depretiate a lot against Can$ within the month?
You go short the US$ forwards at a certain exchange rate. After 1 month, your forward expries and you deliver your USD for Can$ at the forward rate regardless of the spot at the time.
See the link between the 2 bold items?
Yeah, but why can’t I buy Can$, by going long Can$ forwards? Do they just assume you’re always referring to the foreign currency?
IMO, s** hort** a currency forward contract = entering a forward contract to deliver the foreign currency.
This kind of question is very tricky, so being straightforward is important.
if you expect to receive currency in the future, you are exposed or LONG the foreign currency. If as you asked you want to go LONG a forward, you are effectively doubling your exposure to the foreign currency.
When the future arrives: You receive your foreign currency. If you went LONG, you would receive even more foreign currency as it gets delivered to you.
A short is what you want.
My point is I feel there are 2 resolutions here, shorting a forward on the foreign currency or going long a forward on my domestic currency. The book seems to only accept the first. Perhaps they are the same thing, and it’s just semantics. I don’t know.