The pricing of FX forward contracts: micro evidence from banks’ dollar hedging

Puriya Abbassi and Falk Bräuning

No 18-6, Working Papers from Federal Reserve Bank of Boston

Abstract: We use transaction-level data on foreign exchange (FX) forward contracts for the period 2014 through 2016 in conjunction with supervisory balance sheet information to study the drivers of banks? dollar hedging costs. Comparing contracts of the same maturity that are initiated during the same hour of the same day, we find large heterogeneity in banks? hedging costs. We show that these costs (i) are higher for banks with a larger FX funding gap, (ii) depend on banks? FX funding composition in terms of the source (interbank versus retail) and rollover structure (long-term versus short-term), (iii) are lower for banks with deeper internal dollar capital markets, and (iv) increase with banks? shadow cost of capital. Our results are important for understanding how shocks are transmitted internationally through the FX hedging market.

Keywords: FX markets; foreign exchange; dollar hedging; price determination; global banks; international financial shocks (search for similar items in EconPapers)
JEL-codes: D40 E43 F30 F31 G15 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2018-03-01
New Economics Papers: this item is included in nep-ban, nep-ifn and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://www.bostonfed.org/publications/research-de ... rward-contracts.aspx Summary (text/html)
https://www.bostonfed.org/-/media/Documents/Workingpapers/PDF/2018/wp1806.pdf Full text (application/pdf)

Related works:
Working Paper: The pricing of FX forward contracts: Micro evidence from banks' dollar hedging (2018)
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:fip:fedbwp:18-6

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of Boston Contact information at EDIRC.
Bibliographic data for series maintained by Catherine Spozio ().