By Mike Duncan | December 2025
A Practical Framework for Managing Carry, Path Dependency, and Long-Horizon FX Risk
Most institutional FX programmes look controlled in the short term and drift badly over time. The hedge is working. The outcome still disappoints.
Rolling forwards persist not because they are optimal, but because they are familiar and governance-friendly. They reduce quarterly volatility. Over multi-year horizons, carry compounds quietly, path dependency accumulates with every roll, and portfolios built on identical assets end up with materially different outcomes depending entirely on how the overlay was designed.
Two Australian super funds. Identical exposures. Same 70% hedge ratio. After five years, one outperformed the other by 8.4% – purely due to the hedge structure.
What this paper argues
FX hedging is not one problem. Finite exposures need certainty. Indefinite exposures need flexibility. All exposures benefit from a convexity layer that rolling forwards cannot provide. Carry – not volatility – is the dominant driver of long-run outcomes. Most governance frameworks never see it because each individual roll looks fine in isolation.
What it covers
- Why rolling forwards are excellent at reducing short-term volatility and poor at delivering long-term certainty
- Why carry dominates outcomes and how base currency determines whether the same hedge earns 63% or costs 18% over a decade
- When tenor matching works and when it creates more risk than it removes
- Cross-currency swaps: why they look expensive on day one and are often one-third the cost over a full lifecycle
- Options as a control layer: vanilla puts, collars, seagulls, and knock-outs
- A three-layer overlay framework: structural certainty, volatility management, and convexity
The central argument
The hedge did what it was designed to do. The design was wrong. Match the hedge to the exposure. Match the structure to the intent. Most portfolios run one solution for everything, then blame the instrument when outcomes disappoint.
Read the practitioner paper
Designing FX Overlays That Behave
