Demand Effects in the FX Forward Market: Micro Evidence from Banks’ Dollar Hedging

The Review of Financial Studies, forthcoming

62 Pages Posted: 16 Feb 2018 Last revised: 28 Jul 2020

See all articles by Puriya Abbassi

Puriya Abbassi

Deutsche Bundesbank

Falk Bräuning

Federal Reserve Banks - Federal Reserve Bank of Boston

Multiple version iconThere are 2 versions of this paper

Date Written: July 27, 2020

Abstract

Using contract-level supervisory data, we show that dollar forward sales by non-US banks that are initiated at the end of a quarter and mature shortly after it concludes trade at higher prices and higher volumes. These effects are driven by banks with large net on-balance-sheet dollar assets that they can hedge around quarter-ends by selling dollars forward (increasing off-balance-sheet short positions), which suggests regulatory arbitrage to reduce capital charges for open foreign exchange (FX) exposure. Our results indicate that demand effects related to banks’ management of FX exposure are an important driver of deviations from covered interest rate parity.

Keywords: FX markets, demand shifts, hedging, price determination, global banks, international finance

JEL Classification: D40, E43, F30, F31, G15

Suggested Citation

Abbassi, Puriya and Bräuning, Falk, Demand Effects in the FX Forward Market: Micro Evidence from Banks’ Dollar Hedging (July 27, 2020). The Review of Financial Studies, forthcoming, Available at SSRN: https://ssrn.com/abstract=3117397 or http://dx.doi.org/10.2139/ssrn.3117397

Puriya Abbassi (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany
00496965993708 (Phone)

Falk Bräuning

Federal Reserve Banks - Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

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