Currency Hedging Glossary
Currency hedging glossary: every term defined by what it costs you
These are the words defined by cash, not by a dictionary.
These are the words that appear inside a forward contract or a hedging call, and most of them describe one thing: the cash a hedge ties up, and what happens when the rate moves against you before you settle.
Use it as a quick reference. Every term sits behind its own stable anchor, so you can link to it from another page or quote the definition back to a provider in a live conversation.
The terms fall into four groups: the collateral you post, how the forward rate and its timing are built, how you size the hedge, and the heavier instruments you may be quoted but rarely need. Each entry runs two to four sentences and explains the mechanism, not just the meaning.
Currency Expert is a comparison and introduction service. We do not execute transfers or hold client funds. Each definition is also marked up so a search engine can cite it directly.
Jump to a term, and which group carries the money
One click to any definition, grouped by the part of the deal that carries the cash.
The terms fall into four groups: the collateral you post and top up, how the forward rate and its timing are built, how you size the hedge, and the instruments you may be quoted but rarely need.
The collateral group is the one that decides whether you can afford to hold a forward, so it is the group to price first.
- ◆Notional, the face value every figure is taken from
- ◆Settlement / value date, when the currency changes hands
- ◆Deposit (initial margin), the cash held up front
- ◆Margin call, the mid-life top-up demand
- ◆Mark-to-market, the daily revaluation that triggers the call
- ◆Forward points, why a forward can quote worse than spot
- ◆Window forward, drawing the currency across a date range
- ◆Drawdown, taking delivery in one go or in tranches
- ◆Forward roll / historic-rate rollover, extending a slipped date
- ◆Hedge ratio, how much of the exposure you actually cover
- ◆Non-deliverable forward (NDF), for restricted currencies
- ◆Cross-currency swap, a multi-year financing tool
- ◆Money-market hedge, locking a rate by borrowing
- ◆Futures vs forwards, standardised against bespoke
Collateral: the cash a forward ties up before you settle
The load-bearing group, and the one to price. It also carries the two foundation terms the later entries lean on.
Two foundation terms sit here first, so no definition below uses a word you have not already met.
We keep to the terms and their cash effect. For how a forward works from start to finish, see our guide to currency forward contracts, which walks the full mechanism and the decision to hedge or not.
- ◆Notional: the full face value of the contract, the amount of currency you have agreed to buy or sell, for example the £100,000 on a £100,000 forward. It is the number every percentage on this page is taken from. The deposit, the mark-to-market move and any margin call are all a share of the notional, not of the cash you have actually paid in.
- ◆Settlement / value date (maturity): the date the contract completes and the currency actually changes hands, when you pay your side and receive the other, netted against any deposit already held. A forward fixes the rate now for that future date. Your deposit is not a fee lost along the way, it is security returned or netted at settlement, and a slipped settlement date is what forces the rollover problem covered further down.
- ◆Deposit (initial margin): security a provider holds against an adverse move, not a fee, netted off the final balance at settlement. Conventionally 3% to 10% of the notional, so about £5,000 on a £100,000 forward at 5%, but the percentage varies by provider and by your credit, and strong-credit clients are sometimes assessed down to 0%. Treat the quoted figure as a convention to confirm, not a fixed rate.
- ◆Margin call (variation and maintenance margin): the top-up a provider demands when mark-to-market losses erode your posted collateral past a maintenance floor, near 3% of notional by convention but provider-set and not guaranteed. When your equity falls below that floor, the call is usually for enough to restore collateral to the initial deposit level, not merely back up to the floor. Calls are typically due within 24 to 48 hours, and if you do not top up, the provider can close the position and pursue the shortfall. The part providers explain late is that this call can arrive mid-life, long before settlement.
- ◆Mark-to-market (MTM): the daily revaluation of your open position at the current spot rate. When spot moves so your contracted rate is worse than the market, the forward is out of the money and the paper loss is taken from provider-held margin. The point that catches businesses out is that MTM marks to spot, not to your commercial position, so the paper loss and the resulting cash call can land even when the underlying supplier deal is entirely on track and still profitable. This daily revaluation, not the final settlement, is what triggers a margin call and is the source of the liquidity risk you carry over the life of the hedge.
The deposit and margin figures above are provider conventions that vary by provider and by your credit, not fixed facts. Do not quote a 3% floor back to a broker who runs 5%. Provider terms checked July 2026.
One £100,000 six-month forward: how the deposit, mark-to-market and a margin call connect
One clean ticket over a six-month horizon, so you can see how the vocabulary interacts. It is not a second forward walkthrough, and not a decision on whether to hedge.
Take a UK importer buying its supplier currency forward: a £100,000 notional, settling in six months. The 2.6% move below is illustrative, plausible in a normal market but not a forecast. The size of any real call depends on where spot actually goes.
Worked example
Your initial deposit at 5% of the £100,000 notional is £5,000. An illustrative adverse move of about 2.6% over the six months produces a mark-to-market paper loss of about £2,600, cutting your posted collateral from £5,000 to about £2,400.
Because £2,400 now sits below the maintenance floor of about £3,000, which is 3% of the notional, the provider issues a margin call. The call is for about £2,600, the amount that restores collateral to the £5,000 initial deposit level.
The £2,600 loss and the £2,600 call are the same figure by construction, because restoring collateral from £2,400 back to £5,000 is exactly the loss that dropped it. That is arithmetic, not an error.
Keep the two roles apart. The £3,000 floor is the trigger: the call fires only once your equity falls through it. The £5,000 initial deposit is the target the call restores you to. The floor decides whether a call happens, not how big it is.
The deposit is quoted up front. The chance of a mid-life cash top-up is the part underplayed in the sales conversation. Certainty on the rate can still demand cash you did not plan for.
How the forward rate and its timing are built
The terms you meet on a quote or inside a contract, each with the operational catch that the textbook version leaves out.
- ◆Forward points (swap points): the adjustment added to or subtracted from spot to reach the forward rate, set by the interest-rate differential between the two currencies under covered interest parity, not a fee the provider bolts on. The lower-rate currency trades at a forward premium (points added), the higher-rate one at a forward discount (points subtracted). The non-obvious part: when your base currency carries the higher rate, a longer-dated forward can quote worse than today’s spot before any margin, which surprises people who expect the forward to be the better number. As illustration only, not a market call: whether sterling sits on the high or low side of a given pair depends on the rate regime at the time and reverses with monetary policy, so check the direction on your own quote rather than assuming it. Relationships as at July 2026 date quickly.
- ◆Window forward (flexible or time-option forward): lets you draw the currency at any point inside a date window rather than on one fixed day, as a lump sum or in tranches at the same agreed rate, with any undrawn balance settled at maturity. Useful when the payment date is uncertain, but the full notional stays contractually obligated whether or not you end up needing it. Keep it next to drawdown, since the two are the same timing mechanic seen from either end.
- ◆Drawdown: taking delivery of the contracted currency, in one go or in partial tranches within a window forward. This is the FX-delivery meaning, not the trading-loss sense of the word. The point providers underplay: undrawn currency is not cancelled, the balance is still owed at maturity, so a window forward does not quietly release you from what you did not use.
- ◆Forward roll (historic-rate rollover): extending a forward to a later settlement date when the underlying payment slips, done by closing the original contract and opening a new one to the new date. The operational catch, and where UK SMEs get hurt: in a historic-rate rollover the provider carries the original contracted rate forward instead of re-striking at today’s rate, which quietly embeds any existing loss on the old contract into the new one rather than crystallising it as cash. That can push a paper loss out of sight into a worse effective rate on the extended deal, and the roll also re-prices forward points against you. Ask before signing whether an extension rolls at the historic rate or the current market rate, because the two behave very differently for your cash and your books.
Sizing the hedge, and the instruments most UK SMEs are quoted but rarely need
Hedge ratio sizes the cover. The instruments below are heavier tools, and seeing one on a quote for a routine supplier hedge usually signals the structure is more than the job requires.
- ◆Hedge ratio: the share of a known or forecast exposure you actually cover. A business might fix 70% of a forecast $1m of purchases and leave 30% open, and typically hedges a higher proportion of near-term, certain exposure than of a distant, uncertain forecast. The operational catch: a forecast hedge ratio set too high recreates the exact over-hedge problem a forward warns about, because if the forecast volume does not materialise you are committed to currency you no longer need, which is why businesses layer the ratio by time-bucket, heavier on near-certain near-term exposure and lighter on the distant forecast. It is a sizing decision, not a mechanic. Deciding what the ratio should be is a strategy question that sits on our FX risk management guide and hedging strategy guide, not here.
- ◆Non-deliverable forward (NDF): a cash-settled forward for restricted, illiquid or non-convertible currencies, for example the Indian rupee. No currency changes hands, you settle the difference between the agreed rate and a published fixing at maturity. The practical friction, and where disputes arise, is the fixing itself: which reference rate and which fixing date govern the settlement, and whether that date matches when your underlying payment actually lands. If it does not, you settle the NDF but still carry residual exposure on the real payment.
- ◆Cross-currency swap: an exchange of principal and interest payments in two currencies over a period, reversed at the end. It is a financing and balance-sheet tool, usually documented under an ISDA agreement, needing a credit line and carrying its own mark-to-market and margin over a multi-year life. That is why it is mostly institutional and rarely the right answer for a routine SME payment hedge. Seeing one proposed for a simple supplier exposure is a sign the structure is heavier than the job needs.
- ◆Money-market hedge: locking a rate by borrowing today in the currency you will owe, converting at spot and depositing in the other currency until you need it, instead of buying a forward. The earned catch is that it needs a genuine borrowing facility in the sell currency and consumes a credit line you would usually rather keep free for trading, and it front-loads the full cash now rather than posting a small deposit. It works, and occasionally beats a forward on price, but that cash and credit cost is why most businesses use a forward instead.
- ◆Futures vs forwards: futures are exchange-traded, standardised in size and expiry date, and settled with daily cash variation margin. Forwards are over-the-counter, bespoke to your amount and date, and collateralised through a provider deposit. The practical problem for a business hedging a specific invoice is the standardisation: a fixed contract size and fixed expiry rarely line up with a real invoice amount and payment date, so a futures hedge leaves basis or residual exposure you then have to manage separately. A UK business hedging a named invoice almost always wants the forward.
These instrument entries describe provider and market conventions, such as NDF fixing sources, ISDA and credit-line norms, and futures margin mechanics, not fixed rules. Conventions vary by provider, checked July 2026.
Currency Expert’s view
Price these terms, ignore those, and ask before you sign.
Price and confirm in writing the collateral terms: the deposit percentage, how mark-to-market is treated, the maintenance floor and the margin-call window. If your payment date is uncertain, add the rollover basis. Those terms decide your cash flow over the life of the hedge.
Treat the exotic instruments as noise for a routine UK SME supplier hedge. A cross-currency swap, an NDF where the currency is not genuinely restricted, or a futures hedge proposed for a simple exposure is often a sign the structure is heavier, or more expensive, than the transaction needs.
The five questions to ask a provider
Get these answered before you sign, and you have priced the part of a forward that actually costs you.
- 01
The deposit percentage, and what that comes to in pounds on your notional.
- 02
The maintenance floor that triggers a margin call.
- 03
The top-up window you get once a margin call is made.
- 04
Whether an extension rolls at the historic rate or the current market rate.
- 05
The minimum contract size you can book.
Where these terms take you next
Move up to the pillar, or across to the mechanics, then shortlist providers against the questions above.
This glossary sits under our currency hedging guide, which is the place to start if you are weighing whether to hedge at all rather than decoding a single term.
For the full forward mechanism, read our guide to currency forward contracts. To compare fixing all of a payment against keeping flexibility, the fixed versus flexible forward guide and the spot rate versus forward rate guide go deeper.
If a right to walk away matters more than a fixed commitment, our currency options versus forward contracts guide weighs the two.
When you shortlist providers, ask each one the five questions above, then compare their answers against a live mid-market reference for your pair. The answers, not the sales pitch, tell you what a forward will cost you to hold.
Currency Expert is a comparison and introduction service. We do not execute transfers or hold client funds.
Common questions
Is a forward deposit a fee, or do I get it back? +
It is security, not a fee. The provider holds your deposit against an adverse move, and it is netted off the final balance at settlement rather than charged. On a £100,000 forward a 5% deposit is £5,000 of your cash tied up until the contract completes.
What actually triggers a margin call? +
A mark-to-market loss that drags your posted collateral below the maintenance floor, not just any adverse move. It marks to the spot rate, not to your commercial deal, so a call can land even while the underlying trade is still profitable. You usually have 24 to 48 hours to top up.
If my payment date slips, can I just extend the forward? +
Yes, but ask how it rolls. A historic-rate rollover carries the original rate forward and buries any existing loss in the new contract instead of crystallising it as cash. Re-striking at the current market rate behaves differently, so confirm which one you get before signing.
My broker quoted an NDF for a euro invoice, is that normal? +
It is worth questioning. A non-deliverable forward exists for currencies you cannot freely deliver, and the euro is fully deliverable. A plain deliverable forward normally fits a euro invoice, so ask the broker why the NDF was proposed before you accept it.
Met a term on a quote you want checked?
Tell us the currency, the amount and when the payment falls due, and we will introduce you to a provider that fits your exposure and be straight about the deposit, the margin terms and the trade-offs. No cost, no obligation.
For how we compare a provider’s rate and fee against the live mid-market, see how we compare providers.