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Topography of the FX derivatives market: a view from London

Author

Listed:
  • Hacioğlu-Hoke, Sinem

    (Federal Reserve Board and Centre for Economic Policy Research)

  • Ostry, Daniel

    (Bank of England)

  • Rey, Hélène

    (London Business School and Centre for Economic Policy Research)

  • Rousset Planat, Adrien

    (London Business School)

  • Stavrakeva, Vania

    (London Business School and Centre for Economic Policy Research)

  • Tang, Jenny

    (Federal Reserve Bank of Boston)

Abstract

We analyse the behaviour of all financial and non‑financial firms active in the UK FX derivatives market – the largest global centre for currency trading – using transaction‑level data. Based on firm‑level net currency derivatives exposures, we find that UK and EU pension funds, investment funds, insurers, and non‑financial corporations use FX derivatives primarily for hedging purposes, with dealer banks accommodating these clients’ hedging needs. In contrast, hedge funds predominantly utilise FX derivatives to speculate, with their trading activity consistent with carry trade, momentum, and macroeconomic news investment strategies. Lastly, the paper documents many novel facts that should motivate theoretical models.

Suggested Citation

  • Hacioğlu-Hoke, Sinem & Ostry, Daniel & Rey, Hélène & Rousset Planat, Adrien & Stavrakeva, Vania & Tang, Jenny, 2024. "Topography of the FX derivatives market: a view from London," Bank of England working papers 1103, Bank of England.
    • Handle: RePEc:boe:boeewp:1103
    as

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    References listed on IDEAS

    as
    1. Gourinchas, Pierre-Olivier & Ray, Walker & Vayanos, Dimitri, 2022. "A Preferred-Habitat Model of Term Premia, Exchange Rates, and Monetary Policy Spillovers," CEPR Discussion Papers 17119, C.E.P.R. Discussion Papers.
    2. Claudio Borio & Robert N McCauley & Patrick McGuire, 2022. "Dollar debt in FX swaps and forwards: huge, missing and growing," BIS Quarterly Review, Bank for International Settlements, December.
    3. Robin Greenwood & Samuel Hanson & Jeremy C Stein & Adi Sunderam, 2023. "A Quantity-Driven Theory of Term Premia and Exchange Rates," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 138(4), pages 2327-2389.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    FX derivatives; exchange rates; non-bank financial institutions; banks; non‑financial corporations; hedging; speculation; macro news;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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