R19 FX Swap

Ok, Jiao Yang of Kwun Tong Advisors (Volume 3, page 413) is stealing all of my Sunday and I just don’t get it.

Why is the hedge of a short position in 800M Yen not completed with buying an offsetting forward position in Yen of equal size? I don’t understand the forward leg transaction of an FX swap.

The forward leg _ is _ the offsetting forward position of equal size.

Hedge #1 is for a “short position of JPY 800M on a JPY/HKD forward contract”

Think I’m lost in notation here.

For this forward contract to be hedged, did they commit to sell 800M JPY or 800M of the (base currency) HKD? I thought it’s a foreign currency short position in Yen, but the forward contract may also be expressed in terms of the base currency, i.e. selling HKD?

They’re not hedging a forward contract; the forward contract _ is _ the hedge. They’re simply rolling it over.