202120,
You are right - hard for many of us to get our heads around. Bear with me while I try to think this through.
It seems that the hedge was put in place in case we had spare US$ we might need to convert back to Australian at a time when the A$ was exceedingly strong. This hedge becomes a problem when the opposite occurs - the A$ is weaker than the hedged price?
Presumably the hedge means that we are obligated to sell US $ to the extent of about A$650m at an exchange rate of (say) A$1.00 = US$1.05. This was seen as better than (say) selling at A$1.00 = US$1.20. Based on the hedge we would receive A$650m for selling US$684
Now if we were over-hedged and didn't have US$ to shift then we would be in a situation of buying the US$ we had to sell. We would then have to buy the US$684 we sold at an exchange rate of (say) A$1.00 = only US$0.90 - so we would need A$760m (instead of A$650m)- a net liability of $110m due to hedging US$ we did not require to sell at a rate which was never likely to be exceeded anyway?
The fact that we are over hedged would then mean that we don't have a need to sell US$ - but why did we think we might? Were we to have big incomes with massive distributions back to Australia? And why then is CNP the counter party rather than just doing the deal through a bank? Was CNP seen to have a need for US$ ?
My head hurts.....
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