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I think this is a bit odd question. Let us say I want to hedge my fx exposure every month but using 3 month forwards . How can I do that ? Is it not easy just to use 1 month forwards ? I recalculate my expsoure every month. In other words let us say I am us investor but I get my profits from a euro company. So every month I calcuate the expected return I might get the next month and do the hedge accordingly. This is straight forward with a one month forward but assuming there exists only 3 month forward contracts in the market(hypothetical) how can one do the hedging ?

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1 Answer 1

up vote 1 down vote accepted

A good question... clearly you've read using 3 month forwards and see they are more liquid than other FX forward instruments.

I guess that if there were only 3 month forward contracts in the market then by buying and selling the 3 months for different maturities, you could structure a set of 1 month forwards.

so from today 21st Aug to hedge a short position:

  • buy 3 month for 21st Nov
  • wait 1 month until 21st Sep
  • On 21st Sep sell 3 month for 21st Dec

You've covered 1 month from 21st Aug to 21st Sep.

But there's a tail position to cover from 21st Nov to 21st Dec. Maybe someone else can do better there.

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hey thank you.. figured it out.. –  lol Aug 21 at 15:42

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