Hedging currency risk with forwards
A company that sells in euros and pays its costs in dollars carries currency risk: the same sales are worth more or less dollars from one year to the next. A forward contract fixes the rate in advance and removes the swing, at the price of giving up the gain from a favourable move. This lesson works through the arithmetic, shows what the forward points do, and replays 26 years of real euro-dollar changes. A calculator tests how much of the sales to hedge, and Nike's reported hedge results show what a hedging programme looks like in a company's accounts.
- Level
- Beginner
- Reading time
- About 26 minutes
- Know this first
- Exchange rates and payments
By the end you will be able to:
- work out a company's profit at different exchange rates with and without a hedge
- explain what a hedge ratio is and why a company might not hedge everything
- say what forward points are and why they are not a forecast
- judge a hedge by the worst year, the average and the number of years below plan
- read the hedge result a company reports
A swing in the rate is a swing in profit
A US company sells goods in Europe and is paid in euros, but it pays its workers and suppliers in dollars. Each euro it receives is worth a different number of dollars from year to year. The exchange-rates lesson showed how a currency move splits a company’s growth into the part from the business and the part from the currency. This lesson asks what the company can do about the second part, and what it costs.
The tool is a forward contract: an agreement made today to exchange one currency for another at a stated rate on a stated future date. A company that expects to receive euros sells them forward and knows the dollars it will get. To hedge is to take a position that offsets a risk the business already has, as the lesson on options and futures described. The share of the exposure that is hedged is the hedge ratio.
The arithmetic of a forward hedge
Take an invented company that expects to sell 100 million euros of goods next year. It budgets at a rate of 1.10 dollars per euro, so it expects $110 million of revenue. Its costs are fixed in dollars at $88 million, 80% of that figure, which leaves a planned profit of $22 million. Suppose it can sell euros forward at 1.10, the same rate. Here is its profit at three rates a year from now, with three hedge ratios.
| Profit, $ million | Euro falls 10% to 0.99 | Rate unchanged at 1.10 | Euro rises 10% to 1.21 |
|---|---|---|---|
| No hedge | 11.0 | 22.0 | 33.0 |
| Half hedged | 16.5 | 22.0 | 27.5 |
| Fully hedged | 22.0 | 22.0 | 22.0 |
With no hedge, profit moves by $11 million either way, half of the planned profit, because the whole of the euro revenue is exposed. With half the sales sold forward, it moves by $5.5 million. With all of it sold forward, profit is $22 million at every rate: the swing is gone, and so is the extra $11 million that a rise to 1.21 would have brought. A hedge does not make money. It trades the possible gain for removal of the possible loss.
Forward points: the price of certainty
In the example the forward rate equals the plan rate. In practice it does not. The forward rate differs from today’s spot rate by forward points, and the lesson on exchange rates showed why: covered interest parity ties the gap to the difference between the interest rates of the two currencies, not to a forecast of where the exchange rate will go. A company that sells euros forward at a rate 1.5% above spot receives 1.5% more than the spot rate for the hedged part, and one that sells at 1.5% below spot receives 1.5% less. With a spot rate of 1.10, a forward rate 1.5% above is 1.1165.
That makes the choice more than a matter of risk. Whether the forward points help or hurt the company depends on the two interest rates, and the sign can change when central banks move rates. The calculator below lets the points run from 4% below spot to 4% above.
What 26 years of the euro-dollar rate looked like
The Federal Reserve publishes the average dollars per euro for each year. In 1999, the first year of the euro, it was 1.0653. In 2025 it was 1.1306. In between, the year-on-year change was positive in 17 of the 26 years and negative in 9. The largest rise was 19.75% in 2003, and the largest fall was 16.55% in 2015. In 2022 the euro fell again, from 1.1830 to 1.0534, about 11%. A company budgeting on the previous year’s rate would have seen its euro revenue lose about a sixth of its dollar value in 2015, with its dollar costs unchanged.
What a hedge looks like in a company’s accounts
NIKE reports revenue for the year ended 31 May 2026 of $46.4 billion, flat on a reported basis and down 2 percent on a currency-neutral basis. It defines the currency-neutral measure as excluding the impact of translation arising from foreign currency exchange rate fluctuations. In other words, translating its foreign sales into dollars added roughly two points to the growth it reported. That is the effect of the rate on the dollar value of sales abroad.
The hedges appear elsewhere. NIKE says its corporate revenues primarily consist of foreign currency hedge gains and losses related to the revenues of its NIKE Brand and Converse entities. They were $2 million in fiscal 2026 and a loss of $97 million in fiscal 2025. That is a swing of $99 million between two years in a company with revenues of tens of billions of dollars, and it shows the character of a hedging programme: in some years it gains, in others it loses, and the result is small beside the company’s revenue. The company’s own statements here do not say how much of its exposure is hedged, so the figures cannot be turned into a hedge ratio.
Test a hedge on real history
The calculator uses the invented company from the example, per 100 million euros of sales. Each year it takes the previous year’s average rate as the budget rate and the spot rate for selling forward, with the forward points added, and the year’s average rate as the rate it actually gets on the rest. Costs are 80% of the budgeted sales, so the plan profit is 20% of them. It runs every year from 2000 to 2025, or the latest few, with and without the hedge.
With 50% of next year’s €100 million of sales sold forward at the spot rate, over the 26 yearly changes from 2000 to 2025, profit per €100 million of sales averaged $23.8 million with the hedge and $23.9 million without it. The worst year was $14.2 million with the hedge against $4.6 million without it, and the best year $32.5 million against $37.6 million. Profit fell below plan in 9 of the 26 years with the hedge and 9 without it.
Five experiments. First, leave the settings alone: half the sales sold forward at the spot rate, over 26 years. Without the hedge the average year is $23.9 million, the worst $4.6 million and the best $37.6 million, and profit falls below plan in 9 years. With the hedge the worst year improves to $14.2 million and the best falls to $32.5 million, with an average of $23.8 million. Second, hedge 100%. The worst year rises to $17.9 million, the best falls to $29.5 million, and profit never falls below plan. The average is $23.7 million, a little under the unhedged figure, because over these 26 years the euro rose more often than it fell; that is a feature of this sample, not a cost built into hedging. Third, keep 100% and set the forward points to −2%. The company now sells at a rate 2% under spot, the average falls to $21.3 million, $2.6 million below the unhedged average, and profit is below plan in all 26 years: the points are a steady cost. Fourth, set the points to +2%. The average rises to $26.1 million and the worst year to $19.7 million. The same hedge now pays. Fifth, return the points to 0% and test only the last 10 years. The worst year with the hedge is $21.1 million against $10.7 million without it, and profit falls below plan in 3 of the 10 years without the hedge and none with it.
How to judge a hedge
A hedge should be judged by what it was meant to do, which is to narrow the range of outcomes, and not by whether it made money in a given year. In hindsight a hedge always looks wrong in the years when the rate moved the other way. Look at the worst year, at how often profit fell short of plan, and at what the hedge cost on average once the forward points are counted. Then ask how sure the company is about the amount it is hedging. If the euro sales may turn out lower than expected, a 100% hedge leaves the company with a forward contract larger than its actual sales, and the excess is a bet on the rate. That is one reason a company may hedge less than all of its forecast, and why many hedge more of the near-term exposure than the distant. The measure used in the lesson on value at risk can be applied to the same exposure to see how a bad year compares, and the scenario lesson shows how to lay out the cases.
What this lesson leaves out
- Annual averages stand in for the rates actually used. The calculator treats last year’s average as the budget and forward base rate, and this year’s average as the rate on unhedged sales. Real companies set budgets at one date, hedge at many dates and convert at daily rates.
- An invented company. Its sales, costs and the 80% cost share are made up. Real costs are partly in euros, which provides a natural hedge.
- One currency pair, 26 changes. The sample is the euro and the dollar from 2000 to 2025. Changes overlap with trends, and another period or pair could look different.
- Sales are assumed certain. The calculator hedges exactly the sales that happen. In practice the amount is a forecast.
- No counterparty risk, margin or accounting. A forward is a contract with a bank, which can fail to pay, and hedge accounting decides in which period the results appear.
- Forward points are an input. The calculator lets them vary on their own, whereas in reality they follow interest rates.
- No advice. The lesson shows how a hedge works. It does not recommend a hedge ratio.
Common mistakes
Reading the forward rate as a forecast
It follows from interest rates. A forward above spot does not mean the market expects the currency to rise.
Hedging all of an uncertain forecast
If sales fall short, the surplus contracts become a position in the currency.
Judging a hedge by one year
A hedge that gave up a gain in a good year did its job if it protected the bad one.
Ignoring the forward points
At 2% below spot, a full hedge left profit under plan in every one of the 26 years.
Mixing up translation and cash flow
Currency-neutral growth removes the effect of translating foreign sales into dollars. A hedge of future cash flows is a separate matter and appears in separate lines.
Try it yourself
1. In the example, half the sales are sold forward at 1.10. What is profit if the rate falls to 0.99?
Show the working
Revenue = 100 × (0.5 × 1.10 + 0.5 × 0.99) = $104.5 million. Profit = 104.5 − 88 = $16.5 million.
2. The spot rate is 1.10 and euros can be sold forward 1.5% above spot. What is the forward rate?
Show the working
1.10 × 1.015 = 1.1165.
3. The fully hedged company in the example earns $22 million at every rate. How much does it give up if the rate rises to 1.21?
Show the working
Unhedged profit at 1.21 is 121 − 88 = $33 million. The hedge gives up 33 − 22 = $11 million.
4. The average rate fell from 1.3297 in 2014 to 1.1096 in 2015. What was the percentage change?
Show the working
1.1096 ÷ 1.3297 − 1 = −16.55%.
5. NIKE’s corporate revenues, mainly hedge gains and losses, were $2 million in fiscal 2026 and −$97 million in fiscal 2025. What was the change?
Show the working
2 − (−97) = $99 million.
Where this is used
- A treasury team decides each quarter what share of the next year’s foreign-currency sales and costs to lock in.
- A finance director compares the budgeted profit with the profit at several exchange rates before setting a hedging policy.
- An importer buys foreign currency forward to fix the dollar cost of a purchase it has already agreed.
- An analyst reads the line in the accounts that shows hedge gains and losses to see how much the programme moved reported revenue.
- A board asks what the worst year looks like with and without the hedge before approving a policy.
Key terms
- Forward contract
- An agreement to exchange currencies at a stated rate on a stated future date.
- Hedge
- A position taken to offset a risk the business already has.
- Hedge ratio
- The share of an exposure that is hedged.
- Forward points
- The difference between the forward rate and the spot rate.
- Spot rate
- The exchange rate for a deal made today.
- Translation
- Converting foreign-currency results into the reporting currency.
- Currency-neutral
- Growth measured as if exchange rates had not changed.
- Plan profit
- The profit the budget expects at the budget exchange rate.
Questions people ask
Does hedging increase profit?
Not on its own. It narrows the range of outcomes. Whether the average rises or falls depends on the forward points and on how the rate moves.
Why not hedge everything?
The amount to hedge is a forecast. If sales come in lower, an over-large hedge becomes a bet on the exchange rate. A hedge also gives up gains.
Is a forward rate a prediction?
No. It is set by the spot rate and the interest rates of the two currencies, as the exchange-rates lesson showed.
Why can a hedge show a loss when it worked?
Because it was meant to protect against the other direction. A loss on the contract in a year when the sales were worth more is the price of that protection.
Sources and review
- Board of Governors of the Federal Reserve System, US dollars to euro spot exchange rate (AEXUSEU), US dollars to one euro, annual, as published by the Federal Reserve Bank of St. Louis (last updated 5 January 2026). The series notes describe the values as averages of daily figures, noon buying rates in New York (release G.5A). Used for the annual averages from 1999 to 2025.
- Board of Governors of the Federal Reserve System, US dollars to euro spot exchange rate (EXUSEU), monthly (release G.5), used to check the annual averages: the mean of the twelve monthly values is within 0.003 of the annual value in every year from 1999 to 2025.
- NIKE, Inc., NIKE, Inc. Reports Fiscal 2026 Fourth Quarter and Full Year Results (30 June 2026), for revenues of $46.4 billion that were flat on a reported basis and down 2 percent on a currency-neutral basis in the fiscal year ended 31 May 2026, the definition of the currency-neutral measure, and corporate revenues, which primarily consist of foreign currency hedge gains and losses related to revenues, of $2 million in fiscal 2026 and $(97) million in fiscal 2025.
How the numbers were checked: the annual averages were compared with the monthly series for every year from 1999 to 2025. The worked example, the yearly changes, the experiments and every figure in the calculator were recomputed in plain code, and the calculator, which runs separately, was compared with that code for every combination of settings it allows. The company, its costs and the hedge programme in the calculator are invented, and NIKE’s figures are quoted from its release.