Ryuichi Urino
FTSE Russell FICC Product management & research, Senior Director Ryuichi Urino
As index investing continues to expand, currency hedging has become an increasingly important component of portfolio management. For investors with global exposures, currency movements can materially affect returns, making their management a key consideration.
At the same time, currency exposures are continuously evolving due to cash flow and market movements, yet traditional hedging approaches may not always allow for timely and flexible adjustments. Against this backdrop, in this article we explore how greater agility in currency hedging can support more effective portfolio management in index investing.
In practice, currency hedging is not a static exercise. Portfolio exposures evolve constantly as a result of cash flows and portfolio rebalancing. In principle, such changes would call for a continuous reassessment of hedging positions across all currencies and a corresponding rebalancing of FX forward contracts.
However, in multi-currency portfolios, a full restructuring of hedges each time exposures change is often impractical, given transaction costs and the operational complexity associated with the rebalancing of forward contracts. As a result, adjustments are frequently partial or delayed, leaving hedging positions temporarily out of alignment with underlying exposures.
In this context, maintaining a perfectly aligned hedge in line with continuously evolving portfolio exposures is subject to practical constraints. From this perspective, beyond the precision of hedging, the ability to adjust positions in a timely and efficient manner—namely, “agility”—emerges as a key consideration in portfolio management. Accordingly, there is growing interest in more flexible approaches that can complement traditional hedging methods.
Against this backdrop, the Osaka Exchange (OSE) introduced, on 13 April, FX futures referencing the WMR FX benchmark, providing market participants with an additional tool for managing currency exposures. The newly launched OSE contracts cover major currencies, including the US dollar, euro, and the offshore Chinese renminbi (CNH). The contracts are listed on a quarterly cycle (March, June, September and December), with maturities extending up to 15 months, reflecting commonly used tenors in futures contracts.
For investors tracking the FTSE World Government Bond Index (FTSE WGBI), these currencies represent the largest components by market value. In the case of the FTSE WGBI excluding Japan, the US dollar, euro and offshore renminbi together account for approximately 87% of the index by market capitalisation.
FTSE WGBI currency exposures over time
Source: FTSE Russell, data from January 1985-April 2026. Past performance is not a guide to future returns. Please see the end for important legal disclosures.
FTSE WGBI (ex-Japan) currency exposures over time
Source: FTSE Russell, data from January 1985-April 2026. Past performance is not a guide to future returns. Please see the end for important legal disclosures.
Moreover, given the relatively high correlation between the US dollar and euro and several other developed market currencies, these exposures may also serve as practical proxies for hedging purposes. As a result, even with a limited set of currencies, such instruments may provide a sufficiently effective and agile solution for managing currency risk in practice.
It is also important to acknowledge certain limitations. The current contracts are limited to a standardised three-month cycle, which may not fully align with all hedging horizons. In addition, the Chinese renminbi exposure is referenced to the offshore market (CNH), which may not perfectly match onshore (CNY) exposures in all cases.
At the same time, these features should be considered in the broader context of their intended use. The standardised structure of listed futures supports transparency in valuation because these contracts are marked to market daily, while their exchange-traded nature enables more timely and flexible adjustments to hedging positions. As such, these instruments may serve as a practical complement to existing hedging approaches, particularly where agility and operational efficiency are key considerations.
Looking ahead, the development of market liquidity will be an important factor to monitor. While open interest was initially concentrated in USD contracts, trading activity in CNH-denominated futures has increased over time, with open interest in USD and CNH reaching comparable levels as at mid-May 2026. By contrast, activity in EUR contracts remains more limited at this stage.
That said, the concentration of liquidity in the most widely used currency at the initial stage is not uncommon in the development of new markets. As market participation broadens, liquidity in other currencies may be expected to deepen over time, enhancing the overall effectiveness of FX futures as part of a broader hedging toolkit.
In summary, as currency exposures in index portfolios continue to evolve, the ability to adjust hedging positions in a timely and efficient manner is becoming increasingly important. While traditional over-the-counter (“OTC”) instruments remain essential for managing longer-term and more customised exposures, listed FX futures offer a complementary approach that may enhance agility in day-to-day portfolio management.
Although the market is still in its early stages of development, particularly in EUR contract, the combination of broad currency coverage, operational flexibility and transparent pricing suggests that such instruments could play an increasingly relevant role in supporting practical and efficient currency hedging for index investors.
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