FX Link can be leveraged to efficiently offset an existing FX spot hedge or futures basis exposure while mitigating execution risk associated with trading multiple legs independently.
Scenario
A market participant buys spot USD/CAD and establishes a hedge via the liquidity of USD/CAD futures.The result is a neutral market position with basis risk, incurring margin, capital and settlement costs on both legs. The customer intends to subsequently collapse this position, removing the basis risk and cost of the two positions.
OTC approach
- Sell USD/CAD spot via bank/PB relationship and sell a USD/CAD futures contract via the CME Group central limit order book.
- Separately executing two transactions, resulting in applicable prime broker (PB), FCM and CME Group exchange fees, with potential execution risk and the cost of crossing
FX Link approach
- Buy USD/CAD FX Link spread via anonymous central limit order book, selling USD/CAD spot and selling USD/CAD FX IMM-dated, centrally cleared FX futures.
- Removes execution risk, maintaining similar or lower costs, while reducing legging risk and crossing a single spread, or working the order to avoid paying spread.
All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.
