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The pension sector as a foreign exchange market participant
Danish pension wealth has grown substantially in recent years, totalling approximately 175 per cent of GDP. Consequently, the companies' investment and risk hedging decisions have a considerable impact on the foreign exchange market. As a result of the regulation of pension companies and the credibility of Denmark's fixed exchange rate policy, pension companies' level of hedging of foreign exchange risks tends to be considerably smaller in euro than in other currencies such as dollars. Moreover, the hedging ratio in euro varies greatly across the companies. The article analyses the potential impact of the transition to market rate products on the pension companies' hedging of exchange rate risks. Companies with large shares of market rate products tend to rely less on hedging of exchange rate risk. This means that the total hedging ratio is expected to fall in step with the continued gradual transition to market rate products.