FX Risk Management
FX risk management for UK companies
Run currency exposure as a controlled, repeating programme, not a one-off decision to hedge a single payment.
Exposure rarely arrives as one large trade. It builds quietly across forecast invoices, supplier orders and overseas payroll, and it usually only gets attention once a rate move has already reached the margin.
By then the choice is narrower and more expensive. A programme puts a repeatable process around the exposure, so you decide how much to cover and how far out before a bad morning makes the decision for you.
Currency Expert compares business FX providers and introduces you to ones that can run a programme. We do not execute transfers or hold client funds.
There is no charge to use Currency Expert. We may receive a fee from a provider if you become its customer.
Currency exposure comes in three forms, and you would not manage them the same way
Before you name a product, sort your book. What changes value, and when, decides which exposure is worth a hedge and which is not.
Most companies should hedge transaction exposure with cash instruments, which are the actual FX contracts you buy, such as forwards and options, as opposed to operational changes like repricing or moving where you source from.
You rarely need to hedge translation exposure, and economic exposure is largely not hedgeable with the tools on this page. If you take one thing from this section, take that ranking. It decides where the rest of the programme spends its effort.
We would sort your book that way before pricing a single trade.
Transaction exposure
A contracted flow that changes value between the deal date and the settlement date. You have agreed a foreign-currency price, but you have not yet paid or been paid, so the rate can move the sterling result before the cash settles.
This is the one most SMEs should cover, because it lands straight on the margin of a deal you have already agreed. If a rate move can turn a profitable order into a marginal one, leaving it open is a decision to carry that risk.
Translation exposure
A subsidiary’s accounts are consolidated into the GBP parent numbers, changing the reported figures even though no cash moves. It is an accounting effect, not a payment you have to make.
Hedging it can drain real cash to smooth a number that never becomes a bill. You can do it, but you rarely should, and the section on where we draw the line explains why it usually costs more than it protects.
Economic exposure
A sustained rate move reshapes your competitiveness, making your pricing or your supply chain structurally more or less attractive over years rather than at a single settlement date.
A forward or an option will not fix this, because there is no single dated flow to lock. The answer is operational: where you price, where you source, and which currency you bill in. Treat it as a commercial question, not an FX trade.
Run it as a repeating cycle, not a one-off trade
The programme is a loop you run every forecast period over the next six to twelve months. Each step carries the trap that sits inside it.
Identify the flows you can trust
Separate contracted orders and confirmed payroll from the pipeline that sales tends to over-state. Hedge the reliable layer harder and treat the speculative layer with more caution, because a hedge against a flow that never arrives is its own problem.
Measure the net in pounds
Net across dates as well as currencies, and never net a confirmed receivable against a speculative payable that may not turn up. What you need is the net GBP figure and a plausible bad move, not a Value-at-Risk model. That refinement is for larger treasuries.
Set a board-approved policy
Write down how much of the net you will cover and how far out, so the decision is made in the calm and not remade under pressure on a bad morning. The policy is the real decision, and the next section takes it apart.
Execute to the policy
Trade to the policy, not to the rate on the screen. The urge to hold out for a better level is exactly the speculation the policy exists to prevent. How far you spread the cover is a policy parameter, set in the next section, not an improvisation at the desk.
Monitor and mark to market
Reconcile and report every period, and mark the open contracts to market, which means revaluing each one to what it is worth at today’s rate. Watch where an adverse move is quietly building across the whole book, because that is where a call for cash starts.
The policy is the real decision: how much to cover, and how far out
Two numbers do most of the work. The hedge ratio is the share of the net exposure you cover. The time horizon is how far out you cover it.
Start with the hedge ratio. Cover a larger share and you buy more certainty, but you commit more cash and you forfeit more of any favourable move. Cover a smaller share and you keep flexibility, but you leave more of the margin exposed to the rate.
Put it in money. On £2m of net annual exposure, moving your cover from half to three-quarters fixes the sterling cost on an extra £500,000 of it. A 3% rate move on that slice is about £15,000 of certainty bought, and £15,000 of potential upside given up. Neither figure is free.
Horizon is the second lever, and layering is how you handle it. Rather than cover the whole year in one trade, you cover it in tranches, adding as each period comes into clearer view. That is a policy choice about how far out and in how many steps, not a tactic invented at the desk when you execute.
Where a forecast is still moving, our view is that covering all of it is a mistake. You end up committed to buying currency against orders that may never arrive, and the fuller treatment of that error sits in where we draw the line below.
Scope of this page
This page frames the policy parameters. The document itself sits elsewhere.
Here we handle the parameters at programme level, meaning the ratio, the tenor and the layering. Drafting the policy, the governance around it and the board sign-off are a separate job.
For that, read our guide to writing a hedging policy, and for how the instruments combine in practice, our hedging strategies compared.
Matching the instrument to how sure you are of the flow
The instrument follows the certainty of the flow, not the size of it. How sure you are that the payment will happen decides what you should buy.
Natural netting
The only hedge with no cash cost and no counterparty. If you have currency revenue and currency costs, match them so the exposures offset before you buy anything at all.
Exhaust it first. Any volume you can pool and pay out in the same currency never crosses the spread twice. See natural hedging for how to set it up.
Forwards
For flows you are certain will settle, such as contracted orders and confirmed payroll. The certainty of the flow is what justifies a binding obligation to buy the currency.
Expect an initial margin of roughly 5% to 10% of the notional, which is the contract’s face value, the full amount you have agreed to exchange. See how forward contracts work.
Options
For flows that might not land, such as an unwon tender or soft pipeline. A premium, a low-to-mid single-digit percentage of the notional, buys the right to trade without the obligation.
That is what a soft pipeline needs. If the flow disappears, you have lost the premium and nothing more. Weigh it against a forward in our options against forwards guide.
The zero-cost collar
A rate band: a protected floor plus a surrendered ceiling, structured so the premium you pay and the premium you receive net to about zero. It looks free, which is the appeal.
Our view is that the capped upside is the wrong trade for a growing book. A rising exposure will outgrow the ceiling and forfeit more than the premium ever saved. Fine for a flat book, awkward for one you expect to expand.
Read this before you build the book
A hedging programme ties up cash before any payment is due.
A single forward carries an initial margin. A book of them carries that margin in aggregate, and the position is live from the day you place it, long before any supplier is paid.
Then the position moves. If the mark-to-market goes against you far enough, the provider can issue a variation-margin call, which is extra cash it asks you to post when open contracts move against you. On a book, that call can land across every contract at once.
The trigger is a credit or collateral line the provider agrees with you at the outset. A call is a function of that line, not of every out-of-the-money tick. It lands only once the adverse mark exceeds the line, and then it asks for the excess in cash.
This is genuine treasury liquidity risk. If you cannot meet a call, the provider can close out contracts at the worst possible moment and invoice you for the loss. The line you agree, and the cash you keep behind it, belong in the decision from day one.
Where the mark-to-market lands in your accounts, and whether hedge accounting is worth it
The monitoring loop feeds real reporting. Open contracts are revalued at each reporting date, and where that revaluation lands is a question your finance director will ask.
Open forwards and options are remeasured to fair value at each reporting date. Because they are marked to market, the unrealised gains and losses hit the profit and loss account, and they can make your profit look volatile even when the commercial position underneath is protected.
Hedge accounting is the fix. Under IFRS 9, or FRS 102 for many UK companies, it lets the hedge and the hedged item move together in the accounts, so the reported profit reflects the protected position rather than the swing on the contract.
It is not free. You pay for it in formal documentation and effectiveness testing, and you have to set that up before the hedge is placed, not after. For a small book, that compliance effort often outweighs the benefit.
Our view is that for a material, regular programme it is usually worth involving your auditor early, so the documentation exists when you need it. This is general information, not accounting advice. Confirm the treatment with your own auditor before you rely on it.
A rolling USD payables book, hedged to policy
The same numbers, run in real money, so you can see the cash-flow cost and the protection in one picture.
Worked example
You cover 75% with forwards, so $2.25m is locked near 1.337 and about £1.68m is committed. The remaining $750,000, roughly £0.56m, stays open. You hold an agreed collateral line of £75,000. The mid rate is Wise mid-market, checked 14 July 2026.
Now model one direction. Sterling strengthens to about 1.377 after the hedges are placed. The forward book is out-of-the-money, because you agreed to buy dollars at a worse rate than today’s, and the mark is close to £49,000.
That £49,000 sits inside your £75,000 line, so no variation-margin call is triggered. A call only lands if the adverse mark breaks the line, which is the mechanic set out above. It is conditional, not automatic.
At the same time the open 25% gets cheaper. The same $750,000 now costs about £16,000 less in pounds. The move that helps the unhedged slice is the same move that bites on the hedged one.
Had sterling fallen to around 1.297 instead, those forwards would have fixed the payables near £1.68m and protected the budgeted cost, while the open 25% would have cost roughly £17,000 more.
This example deliberately isolates the cash-flow cost that protection carries. The protection itself, a known sterling cost on money you are certain to pay, is the reason you run the book at all.
Where we would draw the line
Two errors do most of the damage, and neither is exotic. Both come from hedging the wrong thing rather than choosing the wrong provider.
The first is over-covering a moving forecast. Cover a number that is still soft and you commit cash and forfeit favourable moves against flows that may never arrive. You have taken on a real obligation to protect an imaginary one, and the policy math from earlier is what keeps you honest about it.
The second is draining working capital to hedge translation exposure. Posting margin and tying up cash to smooth an accounting figure usually protects no actual payment. You have moved real money to steady a number that was never going to become a bill.
Both errors share a shape. They spend cash and liquidity, the things the earlier sections showed a programme already consumes, on exposures that do not reach your bank account. We would hedge the contracted flow that lands on the margin, and be sparing everywhere else.
Choose a provider that can run a programme, and check who is holding the book
A programme needs more than a good spot quote. It needs a provider built to carry a book of forwards, and one you can trust to hold the margin behind it.
Programme support means forward and credit lines, transparent margin-call terms, multi-currency accounts, book-level mark-to-market reporting, and a dealer who answers when you call. A provider geared only to one-off spot payments can move money, but it cannot run the loop you have just read.
We would not trust a programme to a desk that only quotes spot.
What programme support looks like
- ◆forward and credit lines sized to your book, not just per-trade deals
- ◆margin-call terms you can read, with the trigger and notice period stated
- ◆book-level reporting that marks the whole position to market, not one contract
- ◆a named dealer who will talk through timing and layering
The book is only as safe as who holds it
- ◆check the exact legal entity and its status on the FCA Register
- ◆confirm the permission type: a bank, or an EMI or payment institution
- ◆ask whether your posted margin and any pre-settlement funds are safeguarded
- ◆remember safeguarding is not the same as FSCS deposit cover
Read this before you post margin
Safeguarding is not the same as FSCS protection.
A book of forwards is only as safe as the counterparty holding it. Money held with FX brokers, payment institutions and e-money institutions is not covered by the FSCS, because those firms are not banks and do not take legal deposits.
Authorised payment and e-money firms must generally safeguard relevant customer funds in segregated accounts, so they can be returned if the firm fails. That is real protection, and it is different in kind from a deposit guarantee.
The FSCS limit, £120,000 per eligible person, per authorised firm since 1 December 2025, covers deposits at PRA-authorised banks, building societies and credit unions. It does not cover the margin you post with an FX provider, whatever the amount.
When a bank still fits
Where your treasury systems, credit facilities and internal controls already sit with the bank, the convenience and the existing lines can matter more than the last fraction of a per cent on the rate. Test whether its pricing and forward terms are competitive before you assume it.
When a specialist fits
Where you want sharper pricing and hands-on management of the forward book, a specialist earns its place. The value is a dealer who understands the exposure and moves when the timing changes, not simply a tighter headline rate.
The questions that filter a programme provider
Score the answers. A good provider gives you a number and a term. A weak one gives you an adjective.
- 01
Aggregate margin. How is a call triggered across the whole book, and how are we notified. A good answer names the trigger and the notice period.
- 02
Minimum forward size. What is the smallest forward you will book. A weak answer dodges the number.
- 03
Close-out policy. What happens if a forecast flow disappears and we no longer need the currency. A good answer explains the cost and how it is calculated.
- 04
Hedge accounting. Do you support the documentation our auditor will want. A good answer knows what that means.
- 05
The FX margin. Show us the margin in pounds against the mid-market rate, not the word competitive.
- 06
Client funds. How are our funds safeguarded, and under which regulator. A good answer names the entity and the permission.
Tell us about your exposure.
Share the shape of your book: the currencies, the net position, and the horizon you are working to. We will introduce you to providers that run programmes rather than one-off spot, and be straight about the trade-offs.
Currency Expert is a comparison and introduction service. We do not execute transfers or hold client funds. You deal directly with the provider you choose.
Common questions
Can we run a hedge without a credit line by cash-securing the position instead? +
Yes. Instead of an agreed credit line, you fully fund the position with cash the provider holds against it, so there is no separate call to meet.
It removes the liquidity surprise, but it ties up more of your working capital from day one, which is a real cost. We see it suit a business that would rather post cash than carry counterparty credit terms.
What happens to open forwards if the business is sold or breaches a banking covenant? +
Both can force an early close-out. A sale often triggers a change-of-control clause in the FX agreement, and a covenant breach can let the provider or lender demand the contracts be settled or closed.
You would then crystallise any loss or gain on the book at that moment. We would read the close-out and assignment terms before building a large position, not after.
At what size should a board set a formal sign-off threshold for FX? +
There is no fixed figure. A useful trigger is when a plausible rate move on your net exposure could shift reported profit by an amount the board would notice.
Once that is true, put a written threshold in place. Set the exposure level above which hedging needs board approval, and the ratio and horizon the policy allows below it. Size it to your margin, not to a round number.
Run the exposure as a programme, then match the provider to it
A good FX programme is not a market call. You classify the exposure, size the net position in pounds, write the policy, execute to it, and report the result. Then you choose a provider that can carry the book and hold the margin safely.
Tell us the shape of your exposure and we will help you compare the providers that can actually run it. For the single-contract view, read our currency hedging guide.
For how we compare a provider’s rate and fee against the live mid-market, see how we compare providers.