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A Blended Approach to FX Hedging

Why a combination of voice-based and electronic trading platforms can reduce the overall cost of hedging FX risk.

By Joseph C. Lewis, JCRA Financial | Updated on November 11, 2013

A decade ago, the introduction of electronic trading, in conjunction with straight-through processing, increased the efficiency of hedging foreign exchange (FX) exposures. Electronic trading platforms also make it possible to hedge smaller exposures, and they enable companies to hedge exposures in real time as they arise, instead of on a monthly or quarterly basis. As a result, a large portion of FX hedging is conducted on electronic platforms. In fact, the proportion of FX trades executed via electronic platform is currently 46 percent, up from 20 percent in 2004, and the volume of electronic FX trades increased by almost 500 percent over the same period (see Figure 1, below).

Some corporations now use electronic execution to supplement their voice execution, but many use a digital platform for 100 percent of their hedging program. The justifications for using only electronic trading are generally that the platform offers superior pricing and that the company’s hedging strategy and products are “plain vanilla.” In extreme cases, hedging via the electronic platform is company policy and voice execution requires approval as an exception. This can be problematic, as inefficiencies can arise when a company uses only electronic platforms for FX trading.

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