Interpreting Forward Points as the Cost of Shorting a Currency

Summary

The document raises a question about measuring the cost of a currency hedge or short position using an FX forward. It compares the forward-to-spot percentage change for EUR/USD with a quoted estimate of the three-month cost of being long euros and short dollars. The stated spot rate and forward points imply a smaller percentage than the cited article’s estimate, prompting the question of whether transaction costs, balance-sheet costs, or another factor explains the difference.

No answer or calculation is provided, so the discrepancy remains unresolved. The figures alone do not establish that the two percentages use the same convention, direction, annualization, or definition of cost. A forward premium or discount reflects relative funding rates and market basis, while realized hedging cost may depend on the position direction and measurement period. The document is useful as a prompt to distinguish quoted forward pricing from a broader reported hedging cost, but it supplies no evidence identifying which component accounts for the gap.

Key ideas

• The document compares an FX forward premium with a reported cost of a currency position.
• Forward points can be converted into a forward rate and compared with spot as a percentage change.
• A difference between two cost figures may reflect inconsistent definitions, conventions, or measurement periods.
• Relative interest rates and currency basis affect forward pricing.
• The document poses the discrepancy but does not resolve it or identify the relevant costs.

Tags

# Cost of shorting currencies


# Cost of shorting currencies












I thought cost of hedging/going short on a currency with a forward was given by F/S-1 but it seems the author states 0.25% (see below). Am I missing anything (transaction costs, balance sheet costs, etc.)?

25 Feb data

EURUSD spot = 1.2200

3m EURUSD points = 5.0, which implies forward = 1.2205 extracted from this link: https://www.investing.com/rates-bonds/forward-rates

F/S-1 = circa 0.04%. vs 0.25% mentioned in the article

published 25th feb.

"the cost of being short dollars against countries and regions with negative interest rates fell dramatically last year, since the Fed pushed down short rates much more than, say, the Bank of Japan or the European Central Bank. It now costs only about a quarter of a percentage point to be long euros and short dollars for three months."

extract from today's article from BBG.

https://www.bloomberg.com/opinion/articles/2021-02-25/why-the-u-s-dollar-is-more-robust-than-it-looks?srnd=opinion

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

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