3 forward contract uses to diversify your hedging strategy
Darryl Hood
July 5, 2018
A closer look at the ever-popular forward contracts and the different ways to use them…
According to a 2016 survey by Deloitte, 92% of businesses surveyed who use foreign exchange hedging instruments use forward contracts and non-deliverable forwards (NDFs) to manage their FX risk (1). Despite the many different options, products and structured products available, forward contracts still remain the most popular when developing hedging strategies.
We’re going to look at how businesses can get the most out of forward contracts by using them in different ways as part of their hedging strategy.
If you’re new to FX hedging, why not check out our blog: 5 questions to ask before your company considers foreign exchange hedging.
Using forward contracts for a rolling hedge
A rolling hedge is where a business will have a number of separate forward contracts in place with different expiration dates to cover a certain percentage (if not all) of their FX risk over a set time period. Businesses may book new contracts every week, month or quarter for a specified expiration date in line with their forecasted or committed exposure.
Here’s an example of the duration and level of cover a business may take using rolling hedges.
Forecast transactions |
Hedge ratio |
0-3 months |
90% |
3-6 months |
70% |
6-12 months |
50% |
12-18 months |
30% |
Along with the obvious benefit of offering protection against adverse currency market movements, this strategy ensures a business is constantly monitoring and evaluating its FX risk and FX exposure. In addition, it minimises period-to-period price deviations as the shorter the period between booking hedges, the less volatile the currency price will be from hedge to hedge.

Using open forward contracts, or flexible forward contracts
An open forward contract is more flexible than a standard forward contract. The latter commits a business to a pre-determined amount of currency on a fixed expiration date in the future.
Standard forward contract example:
ABC Ltd agrees to buy USD $135,000 from GBP at a rate of 1.35. The maturity date is set for December 31st 2019. On the maturity date ABC Ltd sends their counterparty £100,000 and $135,000 is sent to ABC Ltd’s USD account.
For some businesses this may be a challenge, as they are unable to forecast the exact date they will need to (or be able to) settle the contract.
One alternative is an open forward contract (or flexible forward contract) that allows the business to draw currency from the contract at any time within the specified contract period.
Open forward contract example:
ABC Ltd agrees to buy USD $135,000 for GBP at a rate of 1.35. The maturity date is set for December 31st 2019. ABC Ltd decides to draw down from the contract three times during the contract period: $35,000, $50,000 and $50,000. Each time ABC Ltd draws down from the contract, they send their counterparty the equivalent value in GBP at the agreed exchange rate and the USD are placed in ABC Ltd’s USD account.
If your business has certainty over future FX exposure but less certainty over timings, this slightly more flexible contract may be a useful part of your hedging strategy.
Using forward contracts with market orders
Businesses often use budgeted rates in order to set pricing and to formulate and monitor their hedging strategy. Sometimes achieving those budgeted rates is reliant on the timing of execution of the forward contract. Due to market volatility, the date/time a business books a forward contract can make a big difference to the rate of exchange due to normal currency market fluctuations.
What is a market order?
A market order is an agreement to buy or sell currency when a certain rate is achieved. Most business do not have the time or resource to watch the currency market 24/7, so this offers a way of catching peaks and/or troughs during times of higher currency market volatility such as overnight markets.
Typically there are two common types of market order:
Limit order: this is where an order is placed to automatically buy or sell currency when an exchange rate more preferable than the current market rate is reached. This type of order is used if businesses are hoping to catch a sharp peak in the currency market.
Stop loss: this is where an order is placed to automatically buy or sell currency when an exchange rate less favourable than the current market is reached. These are normally used as a way of protecting a business against losses if the currency market moves adversely.
Businesses can use market orders to execute forward contracts as part of their hedging strategy. If the market is declining, for example, then using a stop loss to book a forward contract may provide a business with longer-term protection against further adverse currency market movements.
When you consider all the ways forward contracts can be used within a hedging strategy, it’s clear why they are so popular among businesses. Figuring out how to manage your FX exposure can challenging, so it’s good to know there are experts available to help you develop the right strategy for your business. For more information speak with one of our experts today

References:
- Deloitte, 2016 Global Foreign Exchange Survey
-
This document is NOT: 1) Advice of any kind, or 2) Approved or reviewed by any regulatory authority, or 3) An offer to sell or a solicitation of an offer to buy any FXIs, or to participate in any trading strategy.
“Cambridge Global Payments” is a trade name, which in this document refers specifically to one or more of these legal entities: Cambridge Mercantile Corp., Cambridge Mercantile Corp. (U.S.A.), Cambridge Mercantile Corp. (Nevada), Cambridge Mercantile (Australia) Pty. Ltd.
Cambridge Global Payments (“Cambridge”) provides this document as general market information subject to: Cambridge’s copyright, and all contract terms in place, if any, between you and the Cambridge entity you have contracted with. This document is based on sources Cambridge considers reliable, but without independent verification. Cambridge makes no guarantee of its accuracy or completeness. Cambridge is not responsible for any errors in or related to the document, or for damages arising out of any person’s reliance upon this information. All charts or graphs are from publicly available sources or proprietary data. The information in this document is subject to sudden change without notice.
Cambridge may sell to you and/or buy from you foreign exchange instruments (including spot and/or derivative transactions; both kinds are here called “FXI”s) covered by Cambridge on a principal basis.
This document is NOT: 1) Advice of any kind, or 2) Approved or reviewed by any regulatory authority, or 3) An offer to sell or a solicitation of an offer to buy any FXIs, or to participate in any trading strategy.
Before acting on this document, you must consider the appropriateness of the information, based on your objectives, needs and finances. For advice, you must contact someone independent of Cambridge.
Certain FXIs mentioned in this document may be ineligible for sale in some locations, and/or unsuitable for you. Contact your Cambridge representative for further information regarding product availability/suitability before you enter into any FXI contract.
FXIs are volatile and may cause losses. Past performance of a FXI product cannot be relied on to determine future performance.
This document is intended only for persons in Canada, the US, and Australia. This document is not intended for persons in the UK or elsewhere in the EEA. In Australia, this publication has been distributed by Cambridge Mercantile (Australia) Pty. Ltd. (ABN 85 126 642 448, AFSL 351278); for the general information of its customers (as defined in the Corporations Act 2001). This entity makes no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law.
Fees may be earned by Cambridge (and its agents) in respect of any business transacted with Cambridge.
The document is intended to be distributed in its entirety. Unless governing law permits otherwise, you must contact the applicable Cambridge if you wish to use Cambridge services to enter a transaction involving any instrument mentioned in this document.
© Copyright 2018, Cambridge Mercantile Corp., ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of Cambridge Mercantile Corp. See www.cambridgefx.com for contact details.