Rolling Three-Month FX Forwards to Hedge Monthly Exposure

Summary

The document considers how a US investor with euro-linked returns might update an FX hedge every month if the hypothetical market offered only three-month forwards. It sketches a rolling approach: enter a three-month forward, then a month later enter an offsetting forward with a later maturity. The example is intended to cover the first month of exposure while using the available longer-dated contracts.

The key complication is the uncovered tail between the original forward’s maturity and the later forward’s maturity. The answer identifies that residual exposure but does not explain how to hedge or manage it, so the proposed sequence is incomplete as a full monthly hedging method. The discussion also does not quantify costs, contract sizing, settlement details, or how changing expected returns affect hedge amounts. It is useful as an illustration of maturity mismatch and rolling-forward logic, rather than as a complete implementation guide.

Key ideas

• A three-month forward can be used to construct a sequence of staggered FX hedge maturities.
• Entering a later-dated forward after one month may cover the first month’s exposure interval.
• Staggering forwards creates a tail exposure between the contracts’ maturities.
• The example raises the tail problem but does not provide a complete hedge for it.

Tags

# hedging with a 3 month fx forward every month


# hedging with a 3 month fx forward every month












I think this is a bit odd question. Let us say I want to hedge my fx exposure every month but using 3 month forwards . How can I do that ? Is it not easy just to use 1 month forwards ? I recalculate my expsoure every month. In other words let us say I am us investor but I get my profits from a euro company. So every month I calcuate the expected return I might get the next month and do the hedge accordingly. This is straight forward with a one month forward but assuming there exists only 3 month forward contracts in the market(hypothetical) how can one do the hedging ?

## Answer by rupweb (score 1, accepted)

https://quant.stackexchange.com/a/14463

A good question... clearly you've read using 3 month forwards and see they are more liquid than other FX forward instruments.

I guess that if there were only 3 month forward contracts in the market then by buying and selling the 3 months for different maturities, you could structure a set of 1 month forwards.

so from today 21st Aug to hedge a short position:

- buy 3 month for 21st Nov

- wait 1 month until 21st Sep

- On 21st Sep sell 3 month for 21st Dec

You've covered 1 month from 21st Aug to 21st Sep.

But there's a tail position to cover from 21st Nov to 21st Dec. Maybe someone else can do better there.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

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