The Role of Hedgers and Speculators in the Currency Futures Markets

Kang et al. (2020) find cross-sectional evidence that short- and long-term variation of position changes are driven by liquidity demand of noncommercials and hedging demands of commercials in commodity futures markets. In this paper, we find the commercials' hedging demands drive both short-term and long-term position changes in a time-series of AUD, GBP, CHF, EUR, JPY and NZD futures markets. The predictability of hedging pressure comes from macroeconomic conditions of both domestic/foreign countries and the implied volatility of corresponding currency options. The important implication for multinational corporations and policymakers is that monitoring the level of perceived hedging pressure by traders may help form an effective hedging strategy for future payables and receivables