When you sell a foreign currency forward....

the implication is that you buy the domestic currency forward right (i.e. you don’t just sell the foreign currency forward)?

If I think euros will depreciate I sell euros forward…but I’ve got to give something up right, I can’t just sell something I don’t have. So at expiration I will essentially give euros and receive dollars at the contracted rate?

Well currencies work always in pair. If you think the euro will depreciate why would you sell it forward? If you sell it forward it means you are currently long the euro so unless the market is pricing a lower depreciation than what you expect you would be better off selling it today…

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right and thats why when we see something like “analyst A will sell euros and buy dollars” its not two separate trades…its essentially synonymous and occurs in the same transaction.

apologies if this is dumb question, just confused me for a bit

I would consider the foreign currency as an asset, priced in domestic currency…Can’t remember where it’s, currency could be an asset class?


Maybe I do not clearly understand ur question…

Forward used to hedge ur position, assume you have an asset dominated in EUR, you short euro forward to hegde the currency risk…

Now, we talk about an arbitrate oppotunity. It mean you do not have the euro asset…

Assume for 1 month period…

US risk free 5%

EU risk free 10%

Current exchange rate is 1:1

Now the market is trading a forward 1 month with euro dereciate 2%. let say 1.02 eur/$us

It means there is an arbitrate oppotunity exist which you can borrow US$ at 5% charge, exchange to euro and loan euro to get 10% interest. immediately, you by euro forward 1 month at 1.02eur/1us$

At expired date, you get 1.1 eur, you exercise the forward by giving 1.1 euro to get 1.1/1.02=1.078$

you pay back 1.05 (principal and interest) and get the risk free profit of 0.028

Finally, you enter a forward (as an arbitrator) if you find a miss-priced currency…base on IRP