Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/183488
Authors: 
Abbassi, Puriya
Bräuning, Falk
Year of Publication: 
2018
Series/Report no.: 
Bundesbank Discussion Paper 42/2018
Abstract: 
Using transaction-level data on foreign exchange (FX) forward contracts, we document large demand-driven heterogeneity in banks' dollar hedging costs. For identification, we exploit regulatory end-of-quarter reporting that penalizes banks' currency exposure with capital surcharges. Contracts that reduce quarter-end currency exposure trade at higher prices, specifically for banks with high dollar funding gaps and high leverage, while access to internal dollar capital markets and bargaining power reduces prices. Spreads between similar contracts with and without initial margin widen with leverage. Our results suggest that banks' shadow costs of capital are important for the international propagation of shocks through FX derivatives markets.
Subjects: 
FX markets
hedging
price determination
global banks
international finance
JEL: 
D40
E43
F30
F31
G15
ISBN: 
978-3-95729-513-2
Document Type: 
Working Paper
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