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hedge currency risk using forward contract

U

uktous

Member
hi,

Suppose I am an UK investor and have to pay $1000 US dollar in a future date.

And the current exchange rate of £/$ is 2:1,

how can I hedge the currency risk by using forward?

Since I worry about £/$ fall, should I “short a pound current forward” , so that I could make a gain in the cash market as pound deprecate?

Or, I should "long a dollar currency forward”, so that I could make a gain as dollar appreciated?
 
Not that I've given it much thought, but are they the same?

Short £ forward is agreement to sell £ (presumably for US$)
Long $ forward is agreement to buy $ (presumably for £)

Need to be clear on both currencies in forward. I suppose it might be possible to have one of them being a notional combination of other currencies, but assuming my interpretation is correct, both will work.

Need to pay in US$ so need to lock in rate to sell £ to buy $ in the future.
 
I think more than making a gain you should be trying to protect yourself against downside risk, i.e. making a loss.

Suppose you have to pay the $1,000 in 30 days.
You think that the currency might be 1:1 in 30 days.
So you would go to an investment bank and agree to exchange £500 for $1,000 in 30 days, based on today's market rate.

If after 30 days, the exchange rates is indeed 1:1, then you will exchange your £500 for $1,000 and use the $1,000 to make the payment.
If you did not have the forward contract you would have to exchange £1,000 for $1,000.

Finally, I think Didster is correct in saying that they are both the same. I'm thinking: am I buying dollars with pounds (treating dollars like a commodity) or am I selling pounds for dollars (treating pounds as a commodity).
Makes sense or did I confuse you more?!?!
 
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