The Pricing of FX Forward Contracts: Micro Evidence from Banks’ Dollar Hedging
The mechanisms that the authors identify are directly relevant to the current policy debate concerning global funding markets and the procyclicality of the U.S. dollar with respect to the broader financial markets and the real economy. In particular, they show that when a shock affects one segment of the funding market it is transmitted to broader financial markets in ways that are shaped by global banks’ foreign-exchange management, including their dollar-hedging behaviors and direct FX funding structures. These findings have important implications for financial-stability-risk monitoring, systemic risk, macroprudential stress-test designs, and the assessments of international spillovers across banks, currencies, and markets. Furthermore, the economically sizable differences in FX hedging costs across banks that the authors document are likely to have implications for the local and international efficacy of regulatory and monetary policy transmission.
via Federal Reserve Bank of Boston
October 16, 2018 at 05:42PM https://ift.tt/2INEVER