FX hedging with forwards
Lock today's rate for tomorrow's payment. The ledger marks the deal twice.
By Solomon Ajayi · Free to read, no signup
Your fintech has committed to paying a supplier USD 100,000 in 30 days. Spot rate today is 1500 NGN/USD = ₦150M. If NGN devalues to 1700 NGN/USD by payment date, the same USD 100,000 will cost you ₦170M, a ₦20M loss for waiting. To LOCK today's economics, you buy a 30-day USD/NGN forward at, say, 1520 (the forward rate factors in the interest-rate differential). On day 30, regardless of where spot is, you pay ₦152,000,000 and receive USD 100,000. The forward itself is a derivative that has to be MARKED TO MARKET on your books every period close. This lesson posts the forward at trade date and at one mark-to-market interval.
A forward is a promise to exchange currency at a rate fixed today for a settlement that happens later. You enter it not to make money but to stop losing it: a known future obligation in a foreign currency is a bet you did not choose to make, and the forward cancels that bet. The catch is that the contract has value the moment the market moves, even though no cash has changed hands, so the ledger cannot ignore it between trade date and settlement.
At inception the forward is worth almost nothing, because the forward rate is calibrated so neither side has an edge on day zero. That is why the trade-date journal entry is just a one-naira placeholder anchoring the contract in audit history; the real schedule lives on a forward contract register, an off-ledger record of open derivatives. Then at every period close you mark to market: if spot has risen above your locked rate, the forward is now an asset, and you debit the FX Forward Asset and credit an Unrealised FX Gain for the difference times the notional.
Where those mark-to-market swings land is a policy choice with real consequences. By default they run through P&L, which makes earnings jump around with the exchange rate even though the underlying hedge is doing its job. Hedge accounting under IFRS 9 or ASC 815 lets you route the swings through Other Comprehensive Income instead, smoothing reported earnings, but it demands formal designation and effectiveness testing at every reporting date.
Worked example, step by step
Trade date: enter 30-day forward at 1520 NGN/USD
Trade booked. At inception, the forward's fair value is approximately ZERO (you didn't pay anything to enter it; the forward rate is calibrated so both parties are indifferent at moment zero). No P&L impact yet. A marker entry to acknowledge the trade is on your books.
| Account | Debit | Credit |
|---|---|---|
| FX Forward Asset (MTM) (1700) | ₦0.01 | |
| FX Forward Liability (MTM) (2700) | ₦0.01 |
FX Forward Asset (MTM) UP ₦1 (debit, placeholder). FX Forward Liability UP ₦1 (credit, placeholder). The real action is on the FORWARD CONTRACT REGISTER (an off-ledger schedule that tracks open derivatives), not the journal. The journal entry exists only to ANCHOR the trade in audit history.
Period close (day 15): mark to market at 1560
Mid-period close. Spot is now 1560 NGN/USD. The forward you bought at 1520 has appreciated, you locked at a price BELOW current spot, so the forward is an asset to you. Mark-to-market gain: (1560 − 1520) × USD 100,000 = ₦4,000,000 unrealised gain. (We omit the further discounting back to PV for simplicity, production engines use it.)
| Account | Debit | Credit |
|---|---|---|
| FX Forward Asset (MTM) (1700) | ₦4,000,000.00 | |
| Unrealised FX Gain (P&L or OCI) (4700) | ₦4,000,000.00 |
FX Forward Asset (MTM) UP ₦4,000,000 (debit). Unrealised FX Gain UP ₦4,000,000 (credit, P&L). The fair value of the forward is now ₦4M positive on your books. The MTM goes through P&L on every close until the forward settles or you elect cash-flow hedge accounting (then it routes through OCI instead).
Takeaway
Forwards hedge known future FX exposure by locking today's rate. The ledger journals are minimal (placeholder at inception, MTM at every period close, gain/loss to P&L or OCI). The real complexity is upstream: identifying exposures correctly, sizing the hedge, choosing P&L vs hedge-accounting treatment. Hedge accounting (IFRS 9 / ASC 815) lets you route MTM swings through OCI instead of P&L, much smoother earnings, but requires formal designation and effectiveness testing at every reporting date. For a fintech with regular cross-border supplier payments, the MTM-through-P&L route is simpler; for a fintech with predictable revenue in foreign currency (Wise model), cash-flow hedge accounting is worth the formality.
Practice this on a real ledger
Reading is half of it. Open this lesson in the lab to post the entries yourself against a real Postgres-backed double-entry ledger, with the validation on. Free, your sandbox is yours.