Why exchange rate volatility is a business problem, not just a finance problem

When doing international business, exchange rate fluctuations can put your bottom line at risk. Even in a relatively stable quarter, a GBP/USD or EUR/USD rate can shift. For a business operating internationally, that gap, which can sometimes be a few pips or several percentage points, can quietly erode margins.

​Consider a UK-based importer paying suppliers in USD. If GBP weakens materially between when a quote is issued and when payment is made, the cost of goods rises, and that cost has to be absorbed somewhere. Either margins shrink, or prices rise, neither of which is a comfortable option in a competitive market. The same applies to exporters.

FX risk is not only a treasury problem. For a business with cross-border revenue or costs, it sits at the heart of financial planning. The question is not whether your business is exposed to FX risk. It is whether you are managing that exposure deliberately.

‍

What is a forward contract?

A Forward contract is an agreement to exchange a set amount of one currency for another at a fixed rate, on a specific future date. You agree on the rate, the amount, and the maturity date at the outset. The rate is then locked in, regardless of where the market moves between now and settlement.

Unlike a Spot contract, where you exchange currency at today's rate for near-immediate settlement, a forward contract gives you certainty about a future transaction.

How forward contracts work: a real-world example

Suppose you are a UK-based importer and want to buy goods worth 50,000 USD in six months. The current GBP/USD rate is 1.20, and you have budgeted your cash flows based on this rate. You worry that the rate may depreciate to 1.10 in 6 months and want to protect your profit margins. If the rate drops to 1.10, instead of 41,666.67 GBP, you must pay 45,454.54 GBP, an additional 3,787 GBP.

That’s where the role of forward contracts comes into the picture. Let’s say you enter into a forward contract with Ebury and lock in a guaranteed exchange rate of 1.20 for a period of six months. On maturity, you pay 41,666.67 GBP to Ebury and receive 50,000 USD.

‍

Types of forward contract: choosing the right structure

Not all forward contracts deliver the same outcomes. Ebury offers several types of forward contracts. The right choice depends on how precisely you can forecast the timing of your future payments or receipts, business needs and goals.

At Ebury, we offer different types of forward contracts to give you the flexibility and choice to decide how you want to trade.

‍

*Note: Ebury offers window NDF synthetics in many currencies. Availability of specific Forward Contract types also varies by jurisdiction, depending on regulatory requirements. Speak to your dedicated client manager to understand what is available for your specific markets.

‍

Benefits of using forward contracts to hedge currency risk

Forward contracts are straightforward and allow you to trade in any size or currency. Benefits include:

Margin protection

Locking in an FX rate reduces the risk that adverse currency moves erode cash-flow profitability. For businesses operating on tight or defined margins — manufacturing, distribution, retail — this matters enormously.

Budget certainty

If you know your cross-border payments and receipts, you can forecast with confidence without adding contingencies based on guesswork.

Operational focus

Managing open FX exposure requires time and continuous market monitoring. Forward contracts take away that burden, so your team can focus on growing the business.

Flexibility to match your cash flows

The wide range of forward contract structures: Fixed, Window, Flexible and Dynamic means you can align your hedging strategy to how your business actually operates, rather than fitting your operations around a rigid instrument.

Access across emerging markets

Ebury offers hedging in 60+ currencies, across both developed and emerging markets, including currencies where many providers offer limited or no coverage.

‍

Important considerations before you hedge

Forward contracts are powerful tools, but it is important to be clear about what a forward contract does not do. It fixes your rate; it does not guarantee it will be the best rate available at maturity. If the market moves in your favour, you may not benefit from that upside. 

Forward contracts come with obligations and risks that every business should understand clearly before entering into a contract. 

Legally binding contracts

In most forward contracts, once agreed, both parties are bound by the terms. That obligation is the mechanism that provides your certainty — and it is important to understand it fully.

In certain circumstances, it may be possible to roll a position forward. Speak to your dedicated client manager about what options are available and relevant to your situation.

Margin calls

If the market moves significantly against your contracted rate, Ebury may require you to post a margin call — a deposit held against the contract as security. This amount is fully returned when the contract settles or matures. The level of any margin call will depend on your individual credit conditions and the size of the market move.

Understanding the potential for margin calls is an important part of managing your cash flow planning when using forward contracts.

Opportunity cost

Because the rate is fixed, you won't benefit if the market moves in your favour after the contract is agreed, unless otherwise mentioned in your contract. For businesses that want to retain some upside participation, options contracts may be worth exploring alongside or instead of forward contracts.

Not a future prediction

Forward rates are derived from the current spot rate and the interest rate differential between the two currencies. They do not predict where the currency will trade at maturity.

FX risk management does not eliminate risk entirely — it transforms uncertain future outcomes into known ones. Past performance or historical rate levels do not indicate future results.

‍

Why currency risk management is a strategic priority

For high-growth businesses, new markets mean new currency exposures. New suppliers or customers in different geographies introduce FX variables that compound quickly as a business scales.

Treating FX as an afterthought, converting at spot when payments fall due and absorbing whatever rate the market offers is a strategy by default for many businesses. For early-stage businesses with modest cross-border volumes, it may be acceptable. For businesses with meaningful international exposure, it introduces avoidable uncertainty into financial performance.

The businesses that manage currency risk well tend to share certain characteristics. They understand their net FX exposure. They hedge in proportion to their risk appetite, rather than hedging everything or nothing. And they review their hedging strategy regularly as their business evolves. Forward contracts, used appropriately within a coherent hedging strategy, are one of the most effective ways for ambitious businesses to protect their bottom line and plan with confidence as they scale internationally.

Why choose Ebury

With 2,000+ specialists across 30+ markets, our teams work with you to understand your business before recommending a strategy, because no two businesses have identical FX risk.

• Enjoy best-in-class credit conditions.
• Hedge up to a maximum of 10 years.
• Manage your currency exposure in 60+ currencies.
• Tailored strategies to meet your needs, goals and exposure profile. 
• Get dedicated support from start to finish.