What is FX risk?
Any company operating internationally faces foreign exchange risk: the possibility that the value of a future cash flow or obligation changes before it is due. Companies mitigate this risk to protect their profits.
An example
Let's take a U.S. company, Acme, with US$10 million in monthly revenue and $5 million in employee expenses. In month 1, Acme earns $5 million in profit. Now imagine Acme's employees are based in Mexico and paid in Mexican pesos (MXN). At the time of hiring, the USD/MXN exchange rate is 20 to 1: one dollar buys twenty pesos. Acme agrees to pay its employees 100 million pesos per month, equivalent to $5 million.
Let's flash forward to month 2: the dollar has depreciated and the USD/MXN rate has moved to 18 to 1. When payday arrives, Acme still owes its employees 100 million pesos, and paying them now costs roughly $5.56 million. Nothing has changed in Acme's business, and yet its profit has been cut by $560,000. Now imagine Acme has employees on two continents, suppliers across seven countries, and customers paying in twenty-three different currencies, each with its own volatile rate. Welcome to running an international business.
The FX Forward
Acme does not want its profit at the mercy of exchange rates. To manage the risk, it turns to the FX forward market. A forward is an agreement to exchange one currency for another at a set rate on a future date. It lets Acme set the rate now for the exchange it will make in month 2, fixing its payroll cost in advance. In the example above, a forward might lock Acme's payroll at $5.1 million, protecting $4.9 million of profit whichever way the rate moves. Think of it as insurance against FX risk.
The FX Forward Market in 2026
To buy that insurance, Acme goes to a bank. Like an insurer, the bank has to assess the risk before it writes the policy. A forward is a promise to settle in the future, and the bank carries the risk that Acme fails to honor it. Will Acme be able to pay the $5.1 million it has committed to? If the dollar strengthens and those pesos can be bought for $4.5 million on the open market, will Acme still settle at the rate it locked?
Before enabling Acme to trade, the bank underwrites Acme's credit. For Acme, the process involves months of legal agreements, term negotiations, and collateral requirements, all for the right to trade with a single provider. To put several banks in competition for a better price, Acme must repeat the entire process and hold capital with each bank.
Even after clearing the bank onboarding process, the forwards a bank offers are limited. Contracts carry minimum trade sizes, often $2 million and up, and fixed maturities. If Acme has a $750,000 exposure due in four days, its bank is unlikely to offer a contract on those terms. Real business exposures rarely arrive in the predefined shapes a bank offers.
Underneath it all sits decades-old infrastructure. Risk and back-office systems at major banks still run on interfaces built in the last century, and trades pass through chains of correspondent banks, each link adding credit, capital, and operational cost to the prices companies see.
The result is a fragmented, rigid, and expensive FX forward market.