Long or short on currency forwards confuses me.

So if we are worried about yen depreciation,beign a US nvestor holding yen, we should enter into a contract to sell the yen at a fixed price…

That is being short the yen forward right? We need to short a forward yen currency contract?

That make the most logical sense, am I right?

Yes, if an US investor is holding Yen, then he should short Yen currency forward to hedge.

if you own an asset - you sell a forward contract.

As a US Investor holding a Yen denominated assets - you have Bought the Yen Asset.

So you Sell a Forward on the Yen.

Ok good, it is as simple as it sounds…

it confuses me because you short the contract, but you are long the currency…

Thanks fellas. We are going to kill this thing.

So you sell a forward on Yen.

Specifically Yen/USD or USD/Yen? I always take the long way. Thinking you will benefit (in the forward/futures) when Yen depreciates. Therefore you want the contracted rate of 100 Yen/USD to drop to 102 Yen/USD.

The sell party payoff = (contracted rate - spot rate) X NP

However when you put this in the formula, you will realize something is wrong (negative payoff despite in your favor). The exchange rate should have been inverted. Is there a rule of thumb to connect the statement “sell a forward on Yen” to assume the denominator is Yen (USD/Yen). Then it is intuitively correct and you can connect the payoff (sell party) formula.

Any thoughts?

look at the Denomination of the asset you own.

then you know what should be on the denominator when you calculate stuff.

otherwise you’ll get Yen^2/USD or USD^2/Yen … which would be weird.

But if u had Yen denominated asset - and USD/Yen on the currency - you get USD ,

In this case the asset is denom in Yen. So I should focus the currency as USD/Yen, Yen being the denominator.

I hedge the currency risk by selling Yen forward, hoping to benefit when 0.01USD/Yen (assume contracted rate) depreciates to 0.009USD/Yen (assume spot at time T).

Then the payoff formula make sense.

Payoff (sell party) = contracted rate - spot rate) X NP = (0.01 - 0.009) USD/Yen * NP (Yen)

You got back the USD. clean and sleek!

Thanks cpk.

where did oyu get the formula from?

It’s a typical forward contract payoff depending if you’re buying (s - x) or selling (x - s).