FX Link: Hedge FX Risk of a Non-IMM Dated FX Exposure

FX Link is a Globex-traded spread between FX Futures and OTC Spot FX. FX Link is traded as a differential between FX Futures and Spot FX. The spread results in the simultaneous execution of FX futures cleared by CME and OTC Spot FX subject to OTC documentation and credit relationships.

Let’s look at a market scenario of how FX Link could be utilized to hedge non-IMM dated FX exposure while still benefiting from the efficiencies of CME’s IMM-dated FX futures.

An Australian commodity exporter is making a delivery of a commodity for US Dollars on a non-IMM date and wants to protect against the risk of US Dollars depreciating versus Australian Dollars during the period prior to the delivery.

The exporter could leverage the OTC market to buy a notionally equivalent OTC AUD/USD forward that matches the exact non-IMM date of the commodity delivery.  This hedges the exporter’s FX risk but introduces counterparty risk and misses the capital efficiency benefits of central counterparty clearing, while introducing potentially expensive PB fees and a wider bid/ask spread due to the custom non-IMM date.

Alternatively, the exporter can leverage CME’s IMM dated FX futures and FX Link to manage cashflows associated with the delivery of the non-IMM dated commodity.

This can be done by initially buying a notionally equivalent number of IMM-dated CME AUD/USD futures contracts, then two business days prior to the commodity delivery, selling the AUD/USD FX Link Spread. Thus, the exporter offsets the original IMM dated CME FX futures hedge while buying AUD/USD Spot. 

By using CME FX Link, the exporter mitigates the non-IMM dated FX forward risk at a potentially lower cost than the OTC transaction, while benefiting from central counterparty clearing, the capital efficiencies of futures position margin netting, and the liquidity of CME’s IMM-dated FX futures.

This is just one example of utilizing FX Link to manage risk and positions across OTC FX spot and CME FX futures, seamlessly connecting the two markets – allowing you to better manage and optimize margin and credit lines across CME FX futures and OTC spot FX transactions.