Work

Hedging of Fixing Exposure

Year: 2025

Type: article

Abstract: ABSTRACT 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 characterize 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 provided that transient impact decays sufficiently quickly and dominates permanent impact.

Source: Mathematical Finance

DOI: 10.1111/mafi.12464

Authors: Johannes Muhle‐Karbe, Roel Oomen, Benjamin Weber

Institutions: Imperial College London, Deutsche Bank (United Kingdom), Carnegie Mellon University

Language: English

Topic: Stochastic processes and financial applications

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $3,840

OpenAlex ID: W4411080241

FWCI:

Cites: 34

Cited by: 1

Related to: 10