Topography of the FX Derivatives Market: A View from London

Sinem Hacioglu Hoke, Daniel A. Ostry, Helene Rey, Adrien Rousset Planat, Vania Stavrakeva and Jenny Tang

No 34588, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Drawing on 100 million transactions, we show how speculators, hedgers, and market makers interact in the world’s largest FX derivatives market, and that derivatives trading can affect exchange rates. Firms in the largest client sectors—pension and investment funds, insurers, and nonfinancials—use FX derivatives primarily to hedge currency risk, with dealer banks providing the liquidity. Hedge funds, with comparatively smaller net exposures, trade speculatively, whereas dealer banks insulate themselves from changes in speculative demand by taking offsetting positions with hedgers, especially nonfinancials. Non-bank market makers, instead, take residual exchange-rate exposures “on the margin”. Hedge funds’ speculative flows help transmit monetary policy shocks to exchange rates, while investment funds' unwinding of hedges contribute to dollar appreciations when credit risk rises. Our results highlight that exchange rates depend on the composition of trading activities in FX derivatives markets.

JEL-codes: F30 F31 G15 (search for similar items in EconPapers)
Date: 2026-01
Note: AP CF IFM
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.nber.org/papers/w34588.pdf (application/pdf)
Access to the full text is generally limited to series subscribers, however if the top level domain of the client browser is in a developing country or transition economy free access is provided. More information about subscriptions and free access is available at http://www.nber.org/wwphelp.html. Free access is also available to older working papers.

Related works:
Working Paper: Topography of the FX derivatives market: a view from London (2024)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:34588

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w34588
The price is Paper copy available by mail.

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().