Dumb question on this
If the questions says "currently hedged with a GBP 100,000,000 forward)
How does that read? GBP/X (long X short GBP?), Delivery 100,000,000 X for Delivery of GBP/X * 100,000,000?
gbp forward means you will get GBPs and pay your home currency if you are long the forward, and the other way around if you are short the forward (just think oil forward: you buy oil if you are long the forward). Now this example tells you have a certain exposure and you hedge, so it depends on the exposure but if there is no further info, it just means it assumes you have a certain home currency and GBP is a foreign currency to you, and your gbp exposure relates to a long position so you want to take a short gbp forward position. At least i think this is what they mean because it’s the most obvious. I don’t know what the rest of the exercise is but i think you shouldn’t do to complicated. Just think you have an exposure and you hedge. At the end, a long position in a gbp forward in dollars is the same as a short position in a dollar forward in gbp. It all depends of your referential. Confirnation from other participants would be appreciated though as i never deal with such things in real life.
Thanks myriam.
So the hedge is to receive GBPs in th future by selling home currency in the future. if you expect the GBP to depreciate, would you sell forwards to capture the appreciation of the home currency right?
Buy USD sell GBPs right?
Right !
If you are expected to receive GBP in future and you expect it to depreciate, you will sell GBP forward (to lock in a fixed rate now).
At maturity, when you receive your GBP payment, use it to settle forward contract at the previous rate.
That’s how I think about it.
Agree with Zulu. To answer your second post Galli, if you have " long exposure" to GBP (and generally when we say “to have exposure” we mean "long) then you would hedge by selling a GBP forward, meaning selling GBP in the future and receiving your home currency in exchange. If you expect GBP to depreciate, you would sell GBP forwards, yes. That way you lock the rate at which you will sell GBPs in the future because you expect future spot rate to be lower than the forward rate