I’m confused about the use of futures to hedge translation risk when an investor wants to hedge a portfolio of assets denominated in a foreign currency.
When an investor wants to invest abroad, doesn’t he buy the foreign currency at the spot price and then hedge translation risk by taking a short futures position in the foreign currency, thereby locking in the exchange rate of the principal at the time of exit?
Therefore wouldn’t the investor’s currency return be -[(F0 - S0)/S0]? Schweser says (FT - F0)/S0.
How is the futures price of the foreign currency at the time of liquidation relevant? Thanks