FX & Risk Management

Learn More About Hedging Tools

Pick the right tool for the job. Below is a fast, practical guide to forwards, options, NDFs, collars, futures, and natural hedges—what they do, when to use them, and the trade-offs.

Forward Contracts

A forward locks today’s exchange rate for a set amount on a future date. On settlement, you exchange notional amounts at the agreed rate, insulating cash flows from moves in the spot market.

Best for

Known future payments (payroll, invoices, loan interest)
Tight budgets where rate certainty matters more than upside

Trade-offs

Pros: Simple, full protection, no upfront premium
Cons: No upside if spot moves in your favor

Plain-English explainer: Forward Contracts

Options (Puts & Calls)

An option gives you the right, not the obligation, to exchange currency at a specific rate (the strike) before or on a date. You pay a premium for that right.

Best for

Uncertain amounts or timing
Wanting protection and partial upside

Trade-offs

Pros: Downside protection with upside potential
Cons: Premium cost; pricing gets complex

Quick example

You buy a USD/JPY put option at 155 for your JPY receivable. If USD/JPY falls to 148, you exercise at 155; if it rises to 160, you skip the option and enjoy the better rate.

Zero-Cost Collars

A collar pairs buying one option and selling another (e.g., buy a put, sell a call) to narrow your rate outcomes. The premium received offsets what you pay—often near zero net cost.

Best for

Budgets needing a floor (protection) and willing to cap upside

Trade-offs

Pros: Limited cost, defined worst-case
Cons: Upside capped at the sold strike

Non-Deliverable Forwards (NDFs)

NDFs are forwards for restricted currencies (e.g., INR, KRW, TWD) settled in a convertible currency like USD. No physical delivery of the local currency.

Best for

Exposures in restricted/illiquid currencies
Accounting hedge of translation or forecast cash flows

Trade-offs

Pros: Access where deliverable forwards aren’t feasible
Cons: Basis risk vs. onshore rates; limited tenors/size

FX Futures

Exchange-traded futures lock a rate similar to forwards but require margin and daily marking-to-market (variation margin).

Best for

Standardized amounts/tenors
Needing exchange transparency and liquidity

Trade-offs

Pros: Exchange clearing, low credit risk, tight spreads
Cons: Margin calls; contract sizes may not match invoices perfectly

Natural Hedges

A natural hedge aligns currency inflows and outflows—e.g., sell in EUR and pay suppliers in EUR—reducing net exposure without derivatives.

Best for

Multicurrency businesses with flexible sourcing/pricing

Trade-offs

Pros: No premiums, operationally simple once set
Cons: May conflict with other goals (quality, suppliers, tax)

Quick Comparison

Tool	Upfront Cost	Upside	Protection	Fit
Forward	None	None	Full to maturity	Fixed dated cash flows
Option	Premium	Yes	Floor or cap	Uncertain timing/amount
Zero-Cost Collar	Low/None	Limited	Defined band	Budget certainty with some give
NDF	None	None	Full (cash-settled)	Restricted currencies
Futures	Margin	None	Full (mark-to-market)	Standard sizes/tenors
Natural Hedge	None	N/A	Reduces net exposure	Operational alignment

Simple Hedging Process

Map exposures: currency, amounts, timing, +/- 20% uncertainty.
Pick objectives: budget certainty, cash protection, or upside room.
Match tools: forwards for fixed cash flows; options/collars for flexible forecasts; NDFs for restricted currencies.
Set % coverage: e.g., 50–80% for 3–6 months; roll quarterly.
Document & monitor: counterparties, rates, and renewal dates.

Rate Impact Calculator

Estimate P&L effect from an FX move and see how a partial hedge changes the residual risk.

Unhedged P&L impact

$0.00

Change in home currency (positive = beneficial for the direction selected)

Residual impact after hedge

$0.00

Assumes hedged portion locked near the current rate (forward-like)

Implied new rate

—

Either the rate you entered or derived from the % move

How this calculation works

Unhedged P&L ≈ Exposure × (NewRate − CurrentRate) × S, where S = +1 if you pay foreign (higher rate costs more), and S = −1 if you receive foreign.
Residual after hedge assumes the hedged portion is locked at the current rate; only the unhedged portion moves with the market.
Use this to compare different hedge coverage levels (e.g., 50%, 75%, 100%).

FAQ

Should I hedge 100% of my exposure?

Often no. Many teams hedge 50–80% for the next 3–6 months, then roll. It balances certainty and flexibility.

What’s cheaper—forwards or options?

Forwards have no premium but remove upside. Options cost a premium but preserve upside. Collars can reduce cost.

When do I use NDFs?

When a currency is restricted or illiquid for deliverable forwards; the hedge settles in USD (or another hard currency).