Hedging Yen Income with Short Yen Futures

Summary

This short exchange explains how an exporter can hedge yen income with a futures position. A short futures position means agreeing to sell yen at the contract price, while a long position means agreeing to buy yen. Because the exporter expects to receive yen and is concerned that its value may decline before conversion, a short position can offset some of the loss in the value of that future income.

The answer gives the basic directional logic: a fall in the yen benefits the short futures position, helping counter the exporter’s currency exposure. It does not work through contract sizing, hedge ratios, basis risk, margin requirements, or the possibility that the yen rises, all of which matter in a real hedge. The example specifies a contract maturity and size, but the response focuses on whether to go long or short rather than calculating the number of contracts or the hedge’s effectiveness.

Key ideas

• A long futures position commits the hedger to buy the underlying currency at the contract price.
• A short futures position commits the hedger to sell the underlying currency at the contract price.
• An exporter expecting yen income can use a short yen futures position to offset a decline in the yen’s value.
• The directional hedge leaves contract sizing and basis risk unaddressed.

Tags

# Should he choose long position or short position?


# Should he choose long position or short position?












On July 2, 1997, a a company is worry about the value of its Yen income over the next few weeks and makes a decision to hedge its risk by taking a position in the futures market. Right now, a futures contract written on the Yen with a maturity of November 1, 1997 has a price of $7.8741/Yen. This contract’s size is 500 Yen per contract. In order to provide sufficient protection, the exporter decides that they need to take a position in 100 contracts.

Should the exporter take a long or short position in the Yen futures contract?

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When I consider, I say “short position” but I am not sure. Please tell me and share with me your opinions

## Answer by JazKaz (score 1, accepted)

https://quant.stackexchange.com/a/54305

A short position is to sell futures

A long position is to buy futures.

If your worried that the price of Yen will fall the best strategy would be one that counters your current position.

If you buy futures you are obligated to buy underlying asset at set price. Helps if currency fluctuates. Sell futures obligates to sell at a set price.

If belief is that currency will fall, the most profitable situation would be like you say to take a short position, if yen drops below the current price, it is a good profit for seller.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.