Hedging of Fixing Exposure

The Working Group on Risk - CREAR, with the support of the ESSEC IDS dpt, Institut des actuaires, Fondation des Sciences de la Modélisation (CY - Labex MME-DII), the group Risques AEF - SFdS, has the pleasure to invite you to the seminar by:

Dr. Roel OOMEN, Deutsche Bank, London (UK)

Wednesday, June 26th, at 12:30pm (Paris) and 6:30pm (Singapore)

Dual format: ESSEC Paris La Défense (CNIT), Room TBA, and via Zoom, please click here.

Topic: FX fixings are an indispensable and widely used reference rate in a market that trades continuously without an official close. Yet, a dealer's handling of fix transactions is a much debated topic. Especially when exposure to the fix is large relative to available market liquidity and hedging may extend to the pre-fix window, an inherent conflict of interest can arise between dealer and client. In this paper we use a model with permanent and transient market impact to characterise a dealer's optimal strategy to hedge fixing exposure. We show that smaller fix exposures are fully hedged over the calculation window, but that larger fix transactions are optimally hedged over a longer horizon that includes the pre-fix window. A client's all-in transaction costs can be lowered by pre-fix hedging when transient impact decays sufficiently quickly and dominates permanent impact.