01
Why currency risk matters
A business that invoices in one currency and pays suppliers in another carries exchange-rate exposure between agreement and settlement. Over longer periods or on larger flows, that gap can materially affect margins.
Insights ·
FX and Currency Hedging Tools
Currency movements can change the value of receivables, payables and margins before a transaction completes. Forwards and non-deliverable forwards are two widely used instruments for managing that exposure, and each suits different currencies and circumstances.
02
Forward contracts
A forward contract is an agreement to exchange one currency for another at a rate fixed today, for settlement on a future date. For convertible currency pairs, forwards are generally settled by delivery of both currencies. A forward provides certainty over the rate, but it does not allow the business to benefit if the market moves in its favour.
03
Non-deliverable forwards
Non-deliverable forwards (NDFs) are used for currencies subject to capital or convertibility restrictions, where physical delivery is not practical. An NDF is settled in cash, usually in US dollars. At maturity, the difference between the agreed rate and a reference rate, published shortly before settlement, is paid between the parties. The restricted currency itself is not delivered.
Liquidity and the tenors available vary by currency and provider. Liquidity generally falls at longer maturities.
04
Settlement conventions
Spot transactions in most currency pairs settle two business days after the trade date (T+2). Some pairs settle sooner. Settlement conventions should be confirmed for each currency and provider before a transaction is agreed.
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Practical considerations
- 01Counterparty credit risk: the exposure to the institution on the other side of the contract.
- 02Documentation and onboarding requirements, which differ by provider and jurisdiction.
- 03Margin and collateral arrangements, where they apply.
- 04For NDFs, reliance on the reference rate and the fixing process.
06
Illustrative example
Illustrative only: a European manufacturer expecting a USD 1 million receipt in six months might consider a forward to fix the euro value of that receipt. The example is general. It is not a recommendation, and no rate is quoted.
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Infrastructure sourcing, not investment advice
Multibanx helps businesses and financial institutions identify FX and hedging providers that hold the relevant permissions and capabilities. This is infrastructure sourcing: we introduce and structure conversations about potential providers.
Multibanx does not provide investment advice, recommend specific trades, or act as a dealer, broker or hedging adviser. Decisions on whether to hedge, and how, should be taken with the business's own financial and regulatory advisers. Each provider's own terms apply.