Delta Hedge is the most important risk hedge operation of exotic trading. Whenever exotic traders has done a exotic FX derivative, they hedge at first by Spot FX. This operation is of course, for a purpose of erasing a risk for delta. But, in this operation, it also enables us to hedge a FXVega. This explanation is as follows.
FX Volatility is quoted in the market as Black Sholes volatility. Black Sholes is supposing that underylying is followed by geometric Brownian Motion. That is, this quoted volatility shows a relative variation for this underlying, not a absolutely variation. Hence, this quoted volatility is propotional to underlying price. From this definition of quoted volatility, quoted volatility mostly increases when spot FX is going down. This correlation is often true at markets.
Therefore, exotic trader take into consideration FX Vega hedging when they hedge delta.
