Research Risk and Trading Plans · Forwards Trading Guide
A complete plan connects the economic purpose to contract terms, cash capacity and review. The final lesson brings the guide into one practical decision record.
Write the purpose and boundary
Identify whether the transaction hedges a commercial exposure or expresses a market view. Record the currency or commodity, amount, certainty, maturity and permitted instruments. For a forecast exposure, define what happens if volume or timing changes. Specify who may approve the trade and which risks the plan intentionally leaves unhedged.
Build a concrete case
A fictional importer owes EUR 100,000 in three months and elects to hedge 60% at 1.1100 USD per EUR. The hedged EUR 60,000 costs $66,600. If spot at payment is 1.1500, the remaining EUR 40,000 costs $46,000, giving $112,600 in total before fees. Full spot conversion would cost $115,000. The benefit is conditional on this scenario, not guaranteed profit.
Test the opposite outcome and liquidity
If spot instead reaches 1.0500, the unhedged portion costs $42,000 and the combined payment is $108,600. Full spot conversion would cost $105,000. The hedge gives up some favourable currency movement in exchange for greater certainty. Also test collateral calls, supplier delays, credit limits and termination costs, because the final invoice comparison does not capture every cash requirement.
Make the plan operational
Record quote comparison, confirmation checks, settlement controls and the process for amendments or rolls. Define review dates and escalation triggers for changed exposure or insufficient liquidity. After settlement, reconcile cash flows and compare the combined outcome with the original objective. Keep the reasoning and lessons learned so the next decision improves the process instead of chasing the last market move.
Try it yourself
In the importer example, the invoice falls to EUR 50,000 after a EUR 60,000 hedge was agreed. What changed and what should the review identify?
Show the worked answer
The hedge now exceeds the invoice by EUR 10,000. The review should identify the surplus exposure and evaluate a permitted amendment, termination or other approved action, including its valuation and costs. The original obligation does not shrink automatically.
Further reading
- RBA: Hedging instruments
- ANZ: Foreign exchange contracts disclosure
- Global Foreign Exchange Committee: FX Global Code
Educational material. Numerical examples are hypothetical and exclude costs unless stated. Forward contracts create binding obligations and may require collateral or credit approval. Actual terms, access and risks depend on the agreement and jurisdiction.
