VoxEU

Why many firms get a bad deal when hedging currency risk

In a column written for VoxEU, GSEM Professor Harald Hau uses new regulatory data to reveal how often firms get a bad deal when hedging currency risk and what they can do to avoid it.

Corporate foreign exchange risk hedging mostly occurs through forward rate contracts with a dealer bank in over-the-counter markets. Unlike in a centralized market, prices are negotiated bilaterally, which gives rise to a large dispersion of transaction prices. It is often difficult for less sophisticated market participants to gauge the quote and execution quality due to the absence of relevant benchmarks, especially in real-time.

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