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Federal Reserve Bank of Boston
Working Papers
The pricing of FX forward contracts: micro evidence from banks’ dollar hedging
Puriya Abbassi
Falk Bräuning
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.


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Puriya Abbassi & Falk Bräuning, The pricing of FX forward contracts: micro evidence from banks’ dollar hedging, Federal Reserve Bank of Boston, Working Papers 18-6, 01 Mar 2018.
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Keywords: FX markets; foreign exchange; dollar hedging; price determination; global banks; international financial shocks
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