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Foreign Exchange

Bank of England FX data show shift to options for hedging

Option trading has grown, while forwards and swaps have fallen.

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Strong growth in options trading highlighted in the latest FX data from the Bank of England is indicative of a move away from the use of forwards and swaps for hedging, say market participants.

The Foreign Exchange Joint Standing Committee FX turnover survey – based on data collected in October 2018 from 28 financial institutions active in the UK foreign exchange market – shows that while options turnover grew by more than 15% between April and October, swaps were down by 11%.

Although overall daily trading turnover was down by $116 billion from the record high of $2,727 billion reported in April 2018, the fall in swap turnover compared with the previous six month period was even higher, at $157 billion, indicating that factors other than market shrinkage contributed to this decline.

In the context of increased appetite for hedging transactions due to market volatility, the traditional method of using forwards and swaps for hedging is being eschewed in favour of options, according to Henry Wilkes, chief executive of pointFX.

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Henry Wilkes, pointFX

The development of trading technology has made it much easier to provide efficient delivery of transparent, simple and flexible option pricing, he adds.




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