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I need to calculate currency returns for 1) short selling the currency and 2) going long in the currency. When going long, the currency is sold at Forward price $F_t$ and bought at spot price $S_{t+1}$. The return is then

$$ R_t = ( F_t - S_{t+1} ) / S_t .$$ This formula is given by a research paper I am trying to replicate. I am now unsure on how to adjust this equation for short selling strategies. When shorting the currency, the currency is bought at forward price $F_t$ and sold at spot price $S_{t+1}$. I would then calculate the return as $$ R_t = (S_{t+1} - F_t )/S_t $$ but am unsure whether this is correct. Does someone have an idea and can help me? Thanks in advance!

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  • $\begingroup$ Yes, if you are using the first equation for a long position it seems appropriate to use the second one for a short position. $\endgroup$ – noob2 Mar 4 at 14:16

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