So for Level III, the CFA uses only the direct quote as far as I’ve seen. I have a question on the convention used though… Let’s say you’re a US company, with operations in the eurozone. You expect to receive 1,000,000 euros in 3 months. The current 3-month forward quote is 1.50 USD/EUR. If you want to fully hedge, is the convention that you would go long or short the 1.50 USD/EUR contract?
short euros in the contract
I get that…I’m saying if a dealer came to me saying “I’m offering 1.50 USD/EUR, do you want to go long or short?”
you only need to choose long or short the foreign currency no matter the quote method
Just think of it more as do you want to buy currency or sell currency. If I have Yen and I am a US investor, I don’t want Yen, I want to sell Yen for dollars. So I’ll sell Yen contracts. Or I can buy U.S. contracts, which is the same thing because I am selling my yen and buying U.S. dollars.
Abushey, I get what you’re trying to ask. I think I’ll think of it as being offered 1.5 USD for 1 EUR. therefore, I’ll go short on the contract. (selling 1 EUR for 1.5 USD) though i may be wrong. I just hope they ask us in plain language which currency to short!
Yes, you always go long (or short) the currency in the denominator…so if you are a US investor receiving EUR income, you want to sell EUR forwards for a USD/EUR quote or buy USD forwards for a EUR/USD quote. I work with currencies all day long in my job and I can assure you that the CFA stuff on currencies is the most confusing stuff that I have ever seen. I drives me insane…
Ok, that makes sense. My brain is playing tricks on me.