Currency Hedging Strategies · Forwards Trading Guide

An exporter expecting foreign currency receipts faces the opposite exposure to an importer. The hedge direction should follow the receipt, not the name of the currency pair.

Follow the incoming cash

A U.S. exporter expects GBP 100,000 from a customer. A fall in dollars per pound reduces the home currency receipt. Selling GBP forward and buying USD fixes the conversion rate for the hedged amount. The company must still collect the pounds. A currency hedge does not insure the customer against default.

Calculate the combined receipt

Suppose the forward sale rate is 1.2600 dollars per pound. The exporter receives $126,000 when the matched GBP receipt is delivered into the contract. At maturity spot of 1.2000, the hedge improves the conversion outcome by $6,000. At spot of 1.3000, it gives up $4,000 compared with an unhedged conversion. Both outcomes serve the same original objective of fixing the dollar receipt.

Separate timing and credit risks

If the customer pays a month late, the exporter may need to source GBP for the forward settlement or agree an extension. That creates funding and transaction costs. If the customer never pays, the forward can remain binding. Link receivables monitoring with the hedge register so that overdue invoices trigger a review rather than an automatic assumption that the derivative will settle itself.

Use a realistic performance measure

Compare the actual combined home currency proceeds with a documented budget rate and the approved hedge policy. Report the hedged proportion, realised customer receipts, uncollected amounts and any residual forward separately. Do not add the contract’s settlement gain to already locked conversion proceeds. That would count the benefit twice.

Try it yourself

An exporter sells EUR 90,000 forward but receives only EUR 75,000. What amount remains unsupported by the expected business receipt?

Show the worked answer

EUR 15,000. The company must review how to obtain, unwind or otherwise manage that remaining contractual amount under its agreement.

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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