Hedging Real Exposures · Futures Trading Guide

A future foreign currency receipt or payment creates an exchange rate exposure. Correct hedge direction depends on both the cash flow and the contract quotation.

Write the cash flow in both currencies

A U.S. business expecting euro receipts is exposed to a falling dollar value of the euro. A U.S. business owing euros is exposed to a rising dollar cost of the euro. For a contract quoted in dollars per euro, the first exposure can be partly hedged with a short and the second with a long. An inverse quotation requires a fresh direction check.

Size the contractual amount

Assume a hypothetical receipt of €250,000 in three months and an illustrative contract representing €125,000. Two short contracts cover the currency quantity. If the future falls from $1.10 to $1.06 per euro, the hedge gains $10,000. If the cash receipt converts at $1.05, it yields $262,500, bringing combined proceeds to $272,500 before costs. Cash and futures prices need not match before expiration.

Keep the receipt and hedge aligned

A late customer payment can require a roll, while a cancelled invoice can leave a naked short currency exposure. Rounding to available contract sizes leaves a residual amount. The settlement currency of futures cash flows can also differ from the company’s reporting currency. Maintain a schedule tying each hedge to its underlying invoice or forecast rather than treating every contract as a standalone profit target.

Compare methods using the full cash process

A forward, a future and an option can manage different aspects of currency risk. Their collateral, credit, flexibility and cash settlement arrangements differ. A futures hedge may require immediate collateral during an adverse move even if the eventual commercial transaction offsets the economics. Verify product eligibility and delivery terms with the intermediary, and evaluate the combined result after conversion and execution costs.

Try it yourself

A dollar based importer owes euros. The selected future rises when the euro strengthens against the dollar. Which hedge direction offsets that risk?

Show the worked answer

A long futures position can gain as the euro strengthens, helping offset the higher dollar cost of the payment. The size and maturity still need to match the exposure.

Further reading

Educational material. Prices, margins and strategy examples are hypothetical unless explicitly identified as contract specifications. They are not trade recommendations. Futures losses can exceed deposited collateral. Product terms and eligibility vary by venue and jurisdiction.

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