Funding Foreign Currency Bonds with Repo to Avoid FX Exposure

Summary

The document explains a way for a domestic investor to hold a foreign currency security without taking direct foreign exchange exposure. It compares three economically equivalent approaches: combine spot and forward FX transactions around the security purchase, use an FX swap, or buy the security and finance it by borrowing in the foreign repo market with the security as collateral.

The example is a US dollar investor who buys a Japanese government bond for yen and pledges that bond in a repo to borrow yen. The borrowed amount funds the purchase in the same currency, so the position does not leave the investor exposed to the bond’s yen value against the dollar in the way an unhedged purchase would. The explanation is brief and illustrative; it does not quantify repo costs, collateral haircuts, basis differences, or residual risks such as mismatched funding terms.

Key ideas

• A foreign security can be financed through a repo in its own currency using the security as collateral.
• Foreign-currency repo funding is presented as equivalent to hedging the purchase with spot and forward FX or an FX swap.
• The example funds a yen-denominated Japanese government bond by borrowing yen against it.
• The explanation omits transaction costs, collateral terms, and other possible residual risks.

Tags

# Funding foreign asset purchase with repo


# Funding foreign asset purchase with repo












https://www.bis.org/publ/qtrpdf/r_qt1709e.pdf

extract from page 38

> An investor wants to buy a foreign currency security with domestic cash but does not wish to run FX risk. Then, three transactions are equivalent. The agent may: combine a spot and forward FX deal, ie buy the required FX spot, purchase the security and sell the same amount of FX forward; use an FX swap, ie swap the domestic currency for the foreign currency and purchase the security; keep the domestic cash and finance the security by borrowing in the foreign repo market, incurring outright debt.

I am a little confused about strategy 3, does it mean you lend your local ccy cash in exchange for the foreign security or something else?

## Answer by dm63 (score 3)

https://quant.stackexchange.com/a/60157

It means: purchase the foreign asset and simultaneously use this asset as collateral to borrow money in the same currency. For example, you are a USD investor. You buy a Japanese Government bond for Yen 1bn, and you enter a repo where you borrow Yen 1bn by pledging the JGB as collateral. By doing this, you have no FX risk.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.