By Mike Duncan | December 2025
Why Rolling Forwards Persist, When They Fail, and How Options Add Value Under Real-World Constraints
Rolling FX forwards are not wrong for equities. They are structurally limited – and most practitioners know this, but use them anyway. That is not negligence. It is organisational Darwinism.
Equity FX exposure has no maturity, no principal repayment, and no defined exit date. That reality breaks most textbook hedging prescriptions. Tenor matching introduces termination risk when portfolios inevitably change. Long-dated hedges create mark-to-market amplification on positions that were never meant to be static. Cross-currency swaps assume a stability of holding period that most equity mandates cannot honestly claim. Rolling short-dated forwards survive because they are liquid, flexible, and easy to resize without crystallising losses. They are robust, not optimal.
The problem is what they do over time. Carry – not volatility – is the dominant driver of long-run FX hedging outcomes. A 49 percentage point difference in cumulative returns over a decade between an AUD and JPY investor hedging the same exposure with the same structure, purely from forward points, is not a rounding error. It is the entire economic argument for whether to hedge at all.
What it covers
- Why rolling short-dated forwards persist – and the real reasons they dominate, not the textbook criticism
- What rolling forwards actually do and what they cannot do, regardless of how well they are managed
- Why carry dominates long-term outcomes and how base currency determines whether hedging earns or costs over a decade
- Why hedge ratios are economic and governance choices, not fixed constants – with a worked example of the rebalancing friction a static 100% hedge creates
- Why FX provides natural diversification for some base currencies during equity stress – and why a blanket hedge ratio destroys that
- When tenor matching fails for equities, and what termination risk actually costs in practice
- FX options as a convexity tool: put spreads, collars, seagulls, and vanilla puts – when each is appropriate and when it is not
- How mandatory hedging regimes change the objective from optimisation to damage control
- A governance communication framework, including a reporting template, common board misunderstandings, and prepared answers to the difficult questions
The central argument
The objective is not to eliminate FX risk. It is to shape it intelligently under real constraints. Match the hedge to the exposure, explicitly accept trade-offs, document decisions, and adjust dynamically. Applying one structure to everything and blaming the hedge when it underperforms is not risk management.
Read the practitioner paper
FX Hedging for Buy-and-Hold Equity Portfolios
FX Hedging For Buy And Hold Portfolios