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Global portfolio investments and FX derivatives

Author

Listed:
  • Tsvetelina Nenova
  • Andreas Schrimpf
  • Hyun Song Shin

Abstract

We show that outstanding volumes in FX swaps serve as a good indicator for the hedging activity associated with portfolio positions of advanced economy bond investors. As such, FX swaps serve as a key barometer of risk-taking and global financial conditions. We develop a simple portfolio choice model for international bond investors and use it to estimate the relationship between global FX hedging activity, relative investment opportunities (captured by the yield curve slopes in respective economies), and the hedging costs associated with underlying investments. We find that higher FX hedging activity is closely associated with US portfolio debt inflows and outflows, indicating that FX hedging plays a crucial role in facilitating cross-border bond investments. This connection between FX hedging motives, portfolio bond flows, and the yield curve highlights a mechanism of international financial spillovers - not only from the US but also from advanced economies with significant accumulated wealth flowing into the US.

Suggested Citation

  • Tsvetelina Nenova & Andreas Schrimpf & Hyun Song Shin, 2025. "Global portfolio investments and FX derivatives," BIS Working Papers 1273, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:1273
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    References listed on IDEAS

    as
    1. Wenxin Du & Alexander Tepper & Adrien Verdelhan, 2018. "Deviations from Covered Interest Rate Parity," Journal of Finance, American Finance Association, vol. 73(3), pages 915-957, June.
    2. Borio, Claudio, 2014. "The financial cycle and macroeconomics: What have we learnt?," Journal of Banking & Finance, Elsevier, vol. 45(C), pages 182-198.
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    Cited by:

    1. Stefan Avdjiev & Patrick McGuire & Goetz von Peter, 2025. "International finance through the lens of BIS statistics: derivatives markets," BIS Quarterly Review, Bank for International Settlements, December.
    2. Inês Lindoso & Andreas Schrimpf & Vladyslav Sushko & Toma Tomov, 2026. "Investment funds' de facto currency risk exposure," BIS Bulletins 123, Bank for International Settlements.
    3. Hyun Song Shin & Philip Wooldridge & Dora Xia, 2025. "US dollar's slide in April 2025: the role of FX hedging," BIS Bulletins 105, Bank for International Settlements.
    4. Julia Schmidt & Maéva Silvestrini & Urszula Szczerbowicz, 2026. "Federal Reserve shocks: which securities really flow?," Working papers 1040, Banque de France.

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    Keywords

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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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