Fix the rate on a receipt that will arrive, and on nothing else.
BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED
A forward exchange contract fixes today the rate at which an exporter will sell a foreign currency receipt on a future date, removing the gain and the loss between invoice and payment. On a US$1.0m invoice priced when a dollar bought 1.50 of the home currency, a fall to 1.35 by payment costs 150,000 — a tenth of the sale — unhedged, and nothing sold forward at 1.50. The rate is not a forecast but the spot rate adjusted for the interest difference between the currencies, and a forward written against a receipt that never arrives becomes a position of its own.
BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.
Issue 02 — Aoraki Trade Exports. Paid in USD, costs in NZD, asking for a NZ$6m multi-currency facility. The MD won't say which currencies. Your call first, then the senior banker's.
An exporter that invoices in a foreign currency has agreed a price in money whose value at home it does not control. Between the invoice and the payment the exchange rate moves, and the exporter gains or loses the difference in its own currency — transaction exposure. A forward exchange contract removes the movement: the exporter agrees today to sell the dollars it will receive on a future date at a rate fixed now.
The rate is not a forecast. It is the spot rate carried forward by the difference in the two currencies' interest rates, because that is what it costs the bank to hold the position. The glossary entry defines the instrument; this page works the receipt it protects.
An exporter — constructed for this page — whose costs are all in its home currency invoices a customer US$1.0m, payable in 90 days. On the day of the invoice a dollar buys 1.50 of the home currency. By the day the customer pays, a dollar buys 1.35.
With home interest rates at 5% and dollar rates at 3%, the 90-day forward would in fact have been a little above spot — about 1.507 — so the hedged exporter keeps roughly 1,507,000, more than the invoice was worth on the day it was priced. Had the dollar strengthened to 1.65 instead, the unhedged exporter would have gained 150,000 and the hedged one would still have 1,507,000. A forward is not a way to win; it is a way to stop playing.
It does not hedge a receipt that never arrives. A forward sold against a contract the customer then cancels leaves the exporter obliged to deliver dollars it does not have, and it buys them at whatever spot is on the day: the hedge has become a position. It does not hedge the margin, only the receipt — an exporter whose costs are also in dollars has less exposure than its sales suggest, and one whose competitors price in dollars has an exposure no forward reaches. And it does not decide how much to hedge; that is a policy, set before the rate moves, so that the dealing room is never deciding it on the day.
Beside the forward sits the money market hedge, which does the same job with a loan: borrow the dollars today against the receipt, convert them at spot, repay the dollar loan when the customer pays. Where a business already has dollar debt or dollar costs, that is often the hedge it is already running without a contract.
WORK IT · THE NUMBER → · A HEDGE THAT OUTLIVES ITS EXPOSURE → · THE MONEY MARKET HEDGE → · HEDGING POLICY AGAINST TIMING →
Issue 02 is an exporter with three-quarters of its sales in dollars, costs at home, and hedge cover that has fallen from nine months to four — the file where a forward book is read as part of the credit, and where the bank's answer carries a minimum hedge-cover covenant. How banks read exporters is the sector read around it, and the FX facility is the product the forwards are written under.
ISSUE 02 · AORAKI TRADE EXPORTS → · TRANSACTION EXPOSURE, DEFINED → · AN INTEREST RATE SWAP →
The recognised ground this page sits beside. Each was opened and checked when cited; none is a source for the framework itself.
THE IN-TRAY · ONE MINUTE
A short file on the ground this page covers. Every option opens with how far it sits from a senior banker’s read.
A company's costs are all in its home currency. It invoices an overseas customer in dollars, payable in 90 days. Between invoice and payment the dollar weakens.
1 FILES · PICK A CALL ON ANY OF THEM
5 MORE ON THE ECONOMY · CURRENCY AND TRADE →WHERE DO YOU READ FROM? THE PLACEMENT →
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