Why rolling forwards persist, when they fail, and how options add value under real-world constraints
FX hedging in buy-and-hold equity portfolios is often discussed as if there were a single “correct” answer. In practice, there isn’t.
Equity FX exposure has no maturity, no principal repayment, and no defined exit date. That reality breaks most textbook hedging prescriptions and explains why rolling short-dated FX forwards remain the dominant structure across institutional portfolios.
FX hedging is best understood through the lens of portfolio behaviour and execution reality rather than theory. Rolling forwards persist because they are liquid and flexible, but they also carry structural limitations that become more visible as horizons extend. Carry, not volatility, is the dominant driver of long-term outcomes, and hedge ratios function as economic and governance choices rather than fixed constants.
Common alternatives also fail in predictable ways. Tenor matching introduces termination and liquidity risk for equities, longer-dated hedges and cross-currency swaps only make sense when holding periods are genuinely stable, and FX options can materially improve outcomes by restoring convexity and reducing pro-cyclical behaviour during stress.
The focus is on real trade-offs, instrument behaviour, and capital impacts under live constraints faced by practitioners responsible for implementing FX hedges in institutional equity portfolios.
Read the practitioner paper
FX Hedging for Buy-and-Hold Equity Portfolios