Currency Hedging Strategies · Forwards Trading Guide

A hedge can become a new exposure when the business forecast changes. The amount that is likely to occur matters as much as the quoted exchange rate.

Classify the forecast

Separate signed invoices, firm orders, probable sales and speculative pipeline. They do not have equal certainty. A forward placed against a forecast remains an obligation even if the forecast disappears. Keep the business evidence and its latest revision date next to the hedge. A sales target is not the same as a legally enforceable foreign currency receivable.

Measure the residual

Suppose an exporter expects EUR 500,000 and sells EUR 400,000 forward. After a customer cancellation, expected receipts fall to EUR 300,000. The hedge now exceeds the forecast by EUR 100,000. Expressed against the new forecast, the hedge ratio is about 133.3%. Calling the original ratio 80% hides the changed exposure.

Test both adverse directions

If the EUR strengthens, acquiring the unsupported EUR amount can become more expensive. If it weakens, the excess short forward may gain, but that gain does not make the mismatch a sound hedge. It is now a separate currency position. Avoid increasing risk simply to recover an earlier loss. Review reduction or termination choices using current executable terms and the approved mandate.

Build review triggers

Set triggers for cancellations, overdue receipts, volume changes and date shifts. Require someone independent of the original trade to check revised amounts. Track gross receipts and payments before any permitted internal netting, especially across different legal entities. Accounting eligibility and hedge documentation require separate professional assessment and should not be inferred solely from the economic hedge ratio.

Try it yourself

A payment forecast falls from USD 1 million to USD 700,000 after USD 600,000 has been hedged. Is it overhedged and what is the updated hedge ratio?

Show the worked answer

It is not overhedged on those amounts. The updated ratio is about 85.7%, calculated as 600,000 ÷ 700,000, leaving USD 100,000 unhedged.

Further reading

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.

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