Question

1. Suppose that your company is based in the UK but has significant sales in the US. You want to hedge your currency exposure for when you convert US dollars back to British Pounds. Should you go long or short the contract?

Answer 1

Here we are told that we want to conver the US dollar to British Pound this implies that we need to sell the US dollar and therefore go short on it and at the same time we will be buying British Pound so we will go long on British Pound.

Now it depends on the nature of the contract we are entering. If the contract is on British pound, such as a call option on the British pound, then we will go long on the contract, however if the contract is on the US dollar, such as a put option on the US dollar then we will go short on the contract. So ultimately it boils down to the underlying of the contract.

Also the same applies on the forwards or futures contract, wherein, if the contract's underlying is US dollar, then we will go Short on such a contract and hedge our exposure because we will fix the rate at which the US dollar will be exchanged to british pound. Howeverm if the underlying is the British Pound then we will go long on the contract as we want to buy the British Pound in exchange of US Dollar.