How to use the forex hedging calculator
The calculator has two tools for two different jobs.
Hedge an exposure is for real-world currency risk: a business waiting for a foreign payment, a company with a supplier bill in another currency, or an investor holding assets abroad.
- Choose whether you will receive or pay the foreign currency.
- Choose the foreign and home currencies and enter the amount in the foreign currency.
- Set the hedge ratio, the share of the amount you want to lock in.
- Enter the spot and forward rates for the pair the form names, for example EUR/USD. Ask your bank or broker for the forward rate for your settlement date.
Offset a position is for traders who want to reduce the risk of an open trade without closing it, by taking a position in a second, correlated pair. Enter the open position, the hedge pair and the correlation between them. If a conversion price is needed to compute pip values, the form asks for that one price.
How the hedge is calculated
Locked-in value = Hedged amount × Forward rate
Value at settlement = Exposure × ST ± Hedged amount × (F − ST)F is the forward rate and ST the spot rate on the settlement date, both expressed as home currency per unit of foreign currency. The hedge gain is added for a receivable and subtracted for a payable. Lots are the hedged amount in the pair's base currency divided by 100,000.
For the offsetting tool, the hedge is sized so that a one-pip move is worth the same in both positions:
Weighted lots = LotsB × |ρ|
Risk left = √(1 + k² − 2k|ρ|)ρ is the correlation of the two pairs' returns. The hedge goes the opposite way when ρ is positive and the same way when ρ is negative. k is the hedge size relative to the pip-neutral size (1 for pip-neutral, |ρ| for weighted). The risk formula assumes both pairs move a similar number of pips.
A worked example
A US exporter due €250,000. EUR/USD trades at 1.085 spot and 1.0905 forward. At today’s spot the receipt is worth $271,250. Hedging 75% means selling €187,500 forward, 1.88 lots of EUR/USD, which locks in $204,469 for that part.
If the euro falls 10% by the payment date, the unhedged receipt would be worth $244,125; with the hedge it is worth $265,500. If the euro rises 10%, the unhedged value would be $298,375 and the hedged one $279,063. Across that range, the hedge shrinks the swing in value from $54,250 to $13,563.
A trader long 2 lots of EUR/USD who wants to reduce risk using USD/CHF, with a correlation of -0.9 and USD/CHF at 0.88. A pip on EUR/USD is worth $10.00 per lot and on USD/CHF $11.36, so the pip-neutral hedge is 1.76 lots of USD/CHF. Because the correlation is negative, the hedge is a buy, not a sell.
Choosing the hedge ratio
The hedge ratio is a trade-off between certainty and opportunity. Using the example receivable:
| Hedge ratio | Value if EUR/USD falls 10% | Value if EUR/USD rises 10% | Swing across ±10% |
|---|---|---|---|
| 0% (no hedge) | $244,125 | $298,375 | $54,250 |
| 50% | $258,375 | $285,500 | $27,125 |
| 75% (example) | $265,500 | $279,063 | $13,563 |
| 100% | $272,625 | $272,625 | $0 |
A full hedge makes the result certain, $272,625 whatever happens, but gives up the upside. Partial hedges are common when the amount itself is uncertain, for example forecast sales, because over-hedging turns a hedge into a speculative position. For a payable the logic reverses: the hedge protects you against the foreign currency rising and costs you if it falls.
Hedging with correlated pairs
Traders sometimes offset one position with another pair rather than closing it, for example to keep a long-term view while reducing short-term risk. Pairs that share a currency are often correlated: EUR/USD and GBP/USD have tended to move together, while EUR/USD and USD/CHF have tended to move in opposite directions. Measure the current figure with the correlation calculator rather than relying on rules of thumb.
Correlation hedges are imperfect by design. At a correlation of -0.9, the pip-neutral hedge leaves about 45% of the original risk. At -0.5 it leaves 100%: a hedge of that size no longer reduces the risk at all. The correlation-weighted size, 1.58 lots in the example, removes slightly more risk when the two pairs move a similar number of pips. Both figures assume the correlation holds, and correlations between currency pairs shift with interest-rate expectations and risk sentiment.
Two practical points matter too. Every hedge costs a spread to open and close, and holding both positions overnight can mean paying swap on both. And in the US, NFA rules do not allow a buy and a sell in the same pair in one account, which is one reason traders look to correlated pairs at all.
What this calculator does not include
- Transaction costs. Forward contracts and spot hedges carry spreads and sometimes fees. See the forex spread calculator.
- Swap and carry. Rolling a spot hedge overnight earns or costs interest; the exposure tool assumes a forward contract instead.
- Margin. A hedge in a trading account ties up margin and can face margin calls if the rate moves sharply before settlement.
- Accounting and tax. Hedge accounting rules and the tax treatment of gains and losses vary by country and entity.
- Changing correlations. The offset tool uses the single correlation you enter.