Hedger Behavior and Its Impact on Order Flow and Exchange Rate in Foreign Exchange Markets

The paper describes main traits of foreign exchange hedger behavior, who is trying to minimize her FX market risk exposure and secure foreign currency liquidity in order to be able to timely settle her liabilities. This behavior is then analyzed in context of several exogenous shocks into prices and exchange rates and implications of how Order Flow and Exchange Rates react to this behavior are drawn. In Section 4 the further empirical research direction based on fuzzy clustered data is outlined.