How much should an exporter hedge?

There is no correct percentage. The right level depends on how reliable the forecast is, how much of a rate move the margin and debt service can absorb, what is already offset naturally and how far ahead selling prices are fixed. Aggregate data will not settle it: the Reserve Bank of Australia reported that non-financial corporations had hedged around 4% of trade receipts with derivatives at the end of March 2022, some relying on natural hedges instead. What a lender looks for is a level the business chose in advance and has kept to.

What is the difference between hedge cover and hedge ratio?

Hedge cover usually refers to foreign-currency income sold forward, in months or as a percentage of expected receipts. Hedge ratio usually refers to the portion of floating-rate debt protected by swaps or caps. The two are measures of the same idea on different exposures, and usage varies, so a reader should check which exposure is the denominator. On a file with both a currency and an interest rate risk, each is reported separately.

What does six months of cover mean?

It means the foreign currency sold forward equals six months of expected net receipts. It does not necessarily mean the next six months are fully hedged, because a layered programme might cover 90% of the next quarter and 20% of a quarter a year away and still add up to six months. To know what is really protected, a reader needs the schedule of contracts by maturity rather than the single figure.

Can a bank require a minimum level of hedging?

Yes, where the facility agreement says so. A minimum hedge-cover undertaking is a term negotiated for the particular borrower, and the amount, horizon and definition of what counts vary from deal to deal. It is more likely where foreign-currency income is large against debt service. The undertaking only works if the bank also provides, or permits, a forward line large enough to meet it, and if the test is reported often enough for the lender to act on it.

// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON

Hedge Cover: a Worked Example

The number that shrinks when no one is looking.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-09 · 6 MIN READ

// THE SHORT ANSWER

Hedge cover tells a lender how much of a business's next year or so of foreign-currency income is already sold at a known rate, and so how much of the budget is still a guess about the exchange rate. It is quoted in months or as a percentage, and it means little without its denominator, which should be net rather than gross receipts. The reading that matters is the movement. A marine electronics exporter whose cover has gone from 57.5% to 25% in a year has 76% more of its income riding on the rate, whether or not anyone chose that.

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.

// MAKE THE CALL

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.

Read the file →

PART OF Foreign Exchange Facilities

// 01 — WHAT THE NUMBER TELLS A LENDER

An exporter's budget is written at an exchange rate. Each forward contract already sold replaces that assumption with a known rate for part of the income. Cover is the share that has been replaced. A lender's interest is simple: the part that is covered will service debt at the agreed rate, and the part that is not depends on the market.

Cover decays by itself. Forwards mature each month, and unless new ones are sold further out, the book shortens. A business that stops dealing, because management thinks the rate will improve or because its forward line is full, does not record a decision anywhere. It simply has less cover at the next date. That is why a lender reads two figures taken a period apart in preference to one.

// 02 — HOW COVER IS CALCULATED

Net exposure = forecast foreign receipts − foreign-currency payments

Cover % = forwards sold over the horizon ÷ net exposure

Months of cover = forwards sold ÷ average monthly net exposure

Three choices change the result. The denominator can be gross receipts or receipts net of costs and debt service paid in the same currency, and a natural hedge already in place belongs in the net figure. The horizon can be six months, a year or longer, and hedges are commonly layered, so near quarters carry more cover than distant ones. And agreements and policies differ on what counts as cover: forwards are the plain case, while bought options, window forwards and structures that hedge only part of the time need a stated treatment.

"Months of cover" is shorthand and can mislead. Three months of cover means the forwards equal three months of net receipts. It does not mean the next three months are fully hedged, because the same contracts may be spread thinly over a year.

// 03 — THE EXAMPLE

A maker of marine navigation electronics, constructed for this page like every figure in it, sells to boatbuilders abroad and expects US$3.00m a quarter, with US$0.60m of dollar costs. Net dollar receipts are US$2.40m a quarter, or US$0.80m a month. The forward book, today and a year ago, against the same forecast for the next four quarters:

A year ago Today

Quarter 1 2.16 (90%) 1.44 (60%)

Quarter 2 1.68 (70%) 0.72 (30%)

Quarter 3 1.20 (50%) 0.24 (10%)

Quarter 4 0.48 (20%) 0.00 (0%)

Sold forward 5.52 2.40

Net exposure 9.60 9.60

Cover on net 5.52 ÷ 9.60 = 57.5% 2.40 ÷ 9.60 = 25.0%

Cover on gross 5.52 ÷ 12.0 = 46.0% 2.40 ÷ 12.0 = 20.0%

Months of cover 5.52 ÷ 0.80 = 6.9 2.40 ÷ 0.80 = 3.0

The net and gross lines show how a change of denominator alone moves the headline, though the trend is the same on both. And today's 3.0 months does not mean three months are hedged: the coming quarter is only 60% covered.

The cost of the decay shows up in a move in the rate. The budget is 1.50 units of home currency per dollar, the forwards are taken as sold at that rate, and suppose the dollar falls 10% to 1.35, a move of 0.15, against EBITDA of 5.00m in home currency:

A year ago: unhedged 9.60 − 5.52 = 4.08 × 0.15 = 0.61m EBITDA 4.39m

Today: unhedged 9.60 − 2.40 = 7.20 × 0.15 = 1.08m EBITDA 3.92m

Now suppose the facility carries an undertaking that at each quarter-end at least 50% of the next two quarters' net receipts is covered. That level belongs to the example. A year ago the test stood at (2.16 + 1.68) ÷ 4.80 = 80%. Today it stands at (1.44 + 0.72) ÷ 4.80 = 45%, and the lender learns of it from the certificate, not from a phone call.

// 04 — WHAT A LENDER READS BESIDE IT

Hedge ratio is the debt-side cousin: the share of floating-rate borrowings protected by swaps and caps. Hedge cover is the income-side measure for currency. The two are often confused because each is a percentage of an exposure, but they answer different questions and sit in different parts of a credit paper.

Beside the cover figure a lender wants the hedging policy, because a level means little unless it can be compared with what the business said it would do. It also wants the rate the book is sold at against the budget rate, because cover at a rate below the budget locks in a shortfall, and the business's forecast record, because a percentage of a wrong number is a wrong percentage. If receipts fall short, the same book can exceed 100% of what actually arrives, and the excess is over-hedging.

DEFINED IN ONE PARAGRAPH → · A FORWARD, FROM THE EXPORTER'S SIDE → · FX FACILITIES →

// 05 — WHERE IT DECIDES A FILE

Issue 02 is an exporter whose cover had shortened from nine months to four while it asked for a further currency on its facility, and the change in cover was part of the credit question. A lender in that position asks why, and the honest answers differ: a forecast that has gone up, a forward line that has filled, or an owner who now expects a better rate. Only the last is a change of risk appetite made without saying so.

Where the currency risk is large against debt service, a lender can write a minimum into the facility, sized and tested in the way that agreement sets out; the form varies. A minimum needs a ceiling beside it, or an undertaking to hedge can push a business into hedging sales it has not made. And the forward line must be big enough to meet the minimum, otherwise the covenant and the credit limit contradict each other.

HOW BANKS READ EXPORTERS → · ISSUE 02 · THE EXPORTER → · DERIVATIVE CREDIT LIMIT →

// SOURCES

The documents the statements on this page rest on. Each was opened and checked when cited.

Reserve Bank of Australia, Foreign Currency Exposure and Hedging in Australia, Bulletin, March 2023 — non-financial corporations — Reports that non-financial corporations hedged around 4% of trade receipts with derivatives at end-March 2022, with some matching dollar borrowing to dollar revenue instead — the FAQ on how much to hedge.

// QUESTIONS PEOPLE ASK

How much should an exporter hedge?: There is no correct percentage. The right level depends on how reliable the forecast is, how much of a rate move the margin and debt service can absorb, what is already offset naturally and how far ahead selling prices are fixed. Aggregate data will not settle it: the Reserve Bank of Australia reported that non-financial corporations had hedged around 4% of trade receipts with derivatives at the end of March 2022, some relying on natural hedges instead. What a lender looks for is a level the business chose in advance and has kept to.
What is the difference between hedge cover and hedge ratio?: Hedge cover usually refers to foreign-currency income sold forward, in months or as a percentage of expected receipts. Hedge ratio usually refers to the portion of floating-rate debt protected by swaps or caps. The two are measures of the same idea on different exposures, and usage varies, so a reader should check which exposure is the denominator. On a file with both a currency and an interest rate risk, each is reported separately.
What does six months of cover mean?: It means the foreign currency sold forward equals six months of expected net receipts. It does not necessarily mean the next six months are fully hedged, because a layered programme might cover 90% of the next quarter and 20% of a quarter a year away and still add up to six months. To know what is really protected, a reader needs the schedule of contracts by maturity rather than the single figure.
Can a bank require a minimum level of hedging?: Yes, where the facility agreement says so. A minimum hedge-cover undertaking is a term negotiated for the particular borrower, and the amount, horizon and definition of what counts vary from deal to deal. It is more likely where foreign-currency income is large against debt service. The undertaking only works if the bank also provides, or permits, a forward line large enough to meet it, and if the test is reported often enough for the lender to act on it.

// NEXT TO IT

// ON WHOSE DESK

The seats that read this term in an ordinary week. Each page says what the seat is for, who arrives in it, and the shape of the round it runs.

Markets salespersonSells the bank's markets products — foreign exchange, interest rate hedging, commodities — to corporate and institutional clients.
Treasury analystFunds the bank and manages the interest rate and liquidity risk created by its own balance sheet.
Corporate coverage bankerOwns the bank's relationship with a large corporate or institutional client and orchestrates everything the bank sells into it.

THE IN-TRAY · ONE MINUTE

Make the call on one file.

A short file on the ground this page covers. Every option opens with how far it sits from a senior banker’s read.

THE FIRST QUESTION · THE LOAN · HEDGES

A floating-rate borrower is offered two products: a swap that fixes its rate at 5%, or a cap that limits its rate to 6% for a fee paid upfront.

What is the difference that matters most?

6 MORE ON THE LOAN · HEDGES →WHERE DO YOU READ FROM? THE PLACEMENT →

THE READING ROOMIN ONE PARAGRAPHHedge cover What is hedge cover, and how much should an exporter have?