- Puzzle motivating the paper: in 2025–26, USD exchange-rate risk rose and intermediary balance sheets were stressed, yet the quantity of FX hedging rose and the cost stayed small — the opposite of 2020, when hedging became more expensive and contracted.
- Core claim: intermediaries retain currency exposure (stay “uncovered”), so their expected return drives hedge supply; the basis reflects the equilibrium of hedging demand, uncovered risk-taking and covered arbitrage — not financial constraints alone.
- Micro evidence (EMIR FX derivatives + UK SFTR repo, 25 dealers, daily Feb 2022–Dec 2025): a USD 1bn rise in dollar hedge supply lifts dealers’ net USD repo borrowing by only about USD 54mn (~5 cents per dollar) — far below the one-for-one of covered intermediation.
- Supervisory PRA110 liquidity reports show UK banks hold large uncovered net dollar positions, driven over time by their FX-derivative positions; and in the cross-section, dealers expecting dollar appreciation buy more dollars forward.
- Time-series: UIP shocks account for 60–70% of G6/USD exchange-rate variance (macro shocks ~30%) and a substantial share of hedging costs/quantities; exogenous hedging-supply/demand shocks explain little.