Topography of the FX Derivatives Market: A View from London
Drawing on 100 million transactions, we show how speculators, hedgers, and market makers interact in the world’s largest FX derivatives market, and that derivatives trading can affect exchange rates. Firms in the largest client sectors—pension and investment funds, insurers, and nonfinancials—use FX derivatives primarily to hedge currency risk, with dealer banks providing the liquidity. Hedge funds, with comparatively smaller net exposures, trade speculatively, whereas dealer banks insulate themselves from changes in speculative demand by taking offsetting positions with hedgers, especially nonfinancials. Non-bank market makers, instead, take residual exchange-rate exposures “on the margin”. Hedge funds’ speculative flows help transmit monetary policy shocks to exchange rates, while investment funds' unwinding of hedges contribute to dollar appreciations when credit risk rises. Our results highlight that exchange rates depend on the composition of trading activities in FX derivatives markets.
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Copy CitationSinem Hacioglu Hoke, Daniel A. Ostry, Hélène Rey, Adrien Rousset Planat, Vania Stavrakeva, and Jenny Tang, "Topography of the FX Derivatives Market: A View from London," NBER Working Paper 34588 (2026), https://doi.org/10.3386/w34588.Download Citation
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