Currency Hedging
Currency hedging for business: protect the margin on a committed foreign payment.
A forward contract fixes the cost of a known future payment, so the margin you signed up for survives to the invoice. Hedging does not try to win on the rate; it removes the guesswork.
The market, in numbers
What is currency hedging?
Take a $671,000 supplier order payable in 90 days, expected to cost about £500,000. If sterling weakens two cents against the dollar first, the bill grows by roughly £3,000, straight off your margin.
The instinct to “wait for a better rate” is itself a bet, just an unmanaged one. A hedge replaces that open exposure with a fixed or bounded outcome you can plan around.
It matters most where a rate move lands directly on margin: a committed foreign cost, a foreign invoice you will receive, or a payment cycle you repeat every month. If your foreign exposure is tiny or one-off, the case is weak; if it is regular or large, doing nothing is the risky choice.
When currency risk becomes a problem
It bites when there is a gap between agreeing a price and settling it in another currency.
- ◆Importers commit to a foreign cost now and pay later; a weaker pound raises the cost of goods after the sale price is set.
- ◆Exporters invoice in a foreign currency and convert on receipt; a stronger pound shrinks what lands in the bank.
- ◆Businesses with recurring foreign payments, such as overseas payroll or monthly supplier runs, face the same move repeated across every cycle, so a bad quarter compounds.
The size of the problem
Across 2026 the pound’s average dollar rate swung from about 1.359 in February to 1.332 in June. On a £500,000 exposure, that is close to £10,000 of movement, decided by the calendar rather than by anything the business did.
How a currency forward works
Lock the rate, remove the guesswork.
Agree the rate
You agree today to buy a set amount of currency at a fixed rate on a future date, or across a window of dates. An unknown future cost becomes a known one.
Place a deposit
The provider carries market risk for you, so it asks for an initial deposit, commonly around 5% of the contract value. It is applied to settlement, not lost.
Manage margin calls
If the rate moves against your booked forward beyond a set trigger, the provider makes a margin call for more cash, usually within one to two business days.
Settle
On the settlement date you buy the currency at the fixed rate. The cost is the number you locked, whatever the market did in between.
Forwards, deposits and margin calls
The forward is the workhorse of business hedging. The deposit and margin call are where the surprises hide.
A forward converts an unknown future cost into a known one. Providers book business forwards up to 12 months as standard, and Currencies Direct offers them up to 24 months.
There are variants worth knowing by name. Ebury, for instance, markets fixed, window, flexible and dynamic forwards, which differ mainly in how much freedom you have over the settlement date. The principle is the same: lock the rate, remove the guesswork.
The honest trade-off is the one every provider should state plainly. A forward fixes your cost, so it also gives up any gain if the rate later moves in your favour. You are buying certainty, and certainty is not free of opportunity cost.
Because the provider carries market risk for you, it asks for an initial deposit, commonly around 5% of the contract value for a business account. It is applied to the final settlement rather than lost.
Then the margin call. If the rate moves against your booked forward beyond a set percentage, the provider asks for more cash to top it up, usually within one to two business days. Rutland FX, as one published example, uses a 3% move as its trigger.
Miss a margin call and the provider can close the contract and invoice you for the loss. On a £500,000 example, a 5% deposit is about £25,000 tied up until settlement. That is not a fee, but it is real cash flow, and it belongs in the decision.
One regulatory point
A deliverable forward used to pay for identifiable goods, services or investment normally sits outside the MiFID investment rules under the “means of payment” exclusion. A non-deliverable forward does not. If a provider frames a hedge as an investment product, we would ask why.
Other ways businesses manage FX risk
Forwards are the default, not the only tool. Several approaches sit alongside them.
- ◆Natural hedging. Matching foreign income against foreign costs so the exposures offset, with no financial instrument involved. The cheapest option where the flows genuinely line up.
- ◆Market and limit orders. A limit order buys currency only if the rate reaches a level you set; a stop-loss executes if it falls to a floor you will not cross. They suit a business with a target rate and some time to wait.
- ◆Staged buying. Hedging a proportion of a forecast exposure and adding more as each period comes into view, which averages your rate over time rather than betting everything on one day.
- ◆Options. A currency option protects a worst-case rate while keeping the upside, in exchange for a premium paid up front. More flexible than a forward, and more expensive.
Currency hedging, weighed up
The case for and against a forward is short and worth stating flatly. It swaps a variable outcome for a fixed one; whether that suits you depends on your margins and cash flow.
- ◆Budget certainty. A known future payment gets a known price you can plan around.
- ◆Protected margins on goods priced months ahead, where that certainty is often the whole point.
- ◆Easier forecasting, with no need to watch the market daily.
- ◆A fixed number replaces an open, unmanaged exposure to the rate.
- ◆You forgo any favourable move if the rate later shifts in your favour.
- ◆A deposit, commonly around 5%, ties up cash until settlement.
- ◆A sharp adverse swing can trigger a margin call for more cash at short notice.
- ◆Over-hedging a forecast that does not materialise leaves you committed to buying currency you no longer need.
How much do businesses actually hedge?
Research from MillTech found the average UK corporate hedge ratio rose to 53% in 2025, with the average hedge length reaching about 5.5 months. A typical treasury team covers roughly half its forecast exposure, a couple of quarters out, and layers on more as time passes.
That is a reference point, not a rule. The right ratio depends on how predictable your cash flows are and how much margin a rate move would cost you. A thin-margin importer hedges more than a business that can absorb a swing.
When we look at a business, we start from how committed and repeated the exposure is, then work back to a ratio that fits the cash flow.
Important — read before you book
Safeguarding is not the same as FSCS protection.
Deposits and margin held for a forward are safeguarded in segregated accounts under FCA rules, separate from the firm’s own funds so they can be returned if the firm fails. That is real protection, and different in kind from a bank deposit.
The FSCS deposit guarantee, £120,000 per person since December 2025, covers bank and building society deposits, not money held with an FX provider, whatever the amount.
Any provider that implies FSCS cover on a safeguarded account is one to question. The FCA’s safeguarding regime also tightens from May 2026.
A UK importer paying a USD supplier.
Certainty cuts both ways. That is the whole decision, laid out with real numbers.
Worked example
Leave it unhedged and by early July the same dollars cost around £503,000, roughly £3,200 more, purely from the rate. Book a forward in April near 1.343 and the cost is fixed at about £500,000, with a deposit of around £25,000 held until settlement.
Now the other side. Over the same window sterling firmed against the euro, so an unhedged €575,000 payable came out about £6,300 cheaper. A forward would have removed that gain too.
The forward was not the wrong call; it simply does what it says, which is to trade the swing for a known number.
How to compare FX hedging providers
Verified from provider websites on 3 July 2026. Terms change; confirm directly before booking.
- 01
Check the rate against the mid-market. The margin in the rate is the main cost of a forward, and it is rarely published, so get live quotes.
- 02
Ask the deposit percentage, the margin-call trigger, and how quickly you must meet a call. These decide your cash-flow exposure.
- 03
Confirm the maximum forward length you can book, and whether it is available online or only by phone.
- 04
Confirm the FCA authorisation and read the safeguarding wording. Money held for a forward is safeguarded, not FSCS-protected.
- 05
Check whether you get a named dealer. On larger or unusual exposures, someone who will talk through timing earns their margin.
Common questions
What is currency hedging in simple terms? +
It is fixing or limiting the exchange rate on a future foreign payment or receipt, so a rate move cannot change your cost or income. The point is a predictable number you can budget against, not a better rate than the market.
How much deposit does a forward contract need? +
Around 5% of the contract value for a business account is common, applied to the final settlement rather than charged as a fee. On a £500,000 forward that is roughly £25,000 of cash tied up until the contract settles.
What is a margin call on a forward? +
If the rate moves against your booked forward beyond a set percentage, the provider asks for extra cash to maintain it, usually within one or two business days. If you do not pay, the contract can be closed and the loss invoiced to you.
Is hedging worth it for a small business? +
It depends on how exposed your margin is. If a rate move would meaningfully dent profit on a committed or repeated foreign payment, a forward buys certainty cheaply. If the exposure is small or rare, the deposit and admin may outweigh the benefit.
Is my money safe with an FX provider when I hedge? +
Deposits and margin are safeguarded in segregated accounts under FCA rules, and those rules tighten in May 2026. This is not the same as FSCS deposit protection, which applies to banks. Read the provider’s safeguarding statement and confirm its FCA authorisation.
Can we hedge without forward contracts? +
Yes. Natural hedging matches foreign income to foreign costs; limit and stop orders target a rate; staged buying spreads purchases over time; options cap the downside while keeping upside for a premium. The right mix depends on how predictable your flows are.
Tell us about the exposure.
Share the currency, the amount, and when the payment falls due, and we will introduce you to a provider that fits your exposure and cash flow, and be straight about the trade-offs. No cost, no obligation.