Using FECs to Navigate Foreign Exchange Volatility

Global currency markets are experiencing increased volatility due to interest rate changes, geopolitical tensions, and trade disruptions. In response, businesses are shifting away from spot transactions, which involve buying or selling currency for immediate delivery, and are increasingly using Forward Exchange Contracts (FECs).

Understanding a Forward Exchange Contract (FEC)

An FEC is a contract that allows a business to fix an exchange rate today for a currency payment or receipt at a future date.

For example: a South African importer expecting to pay a US supplier in three months can use an FEC to lock in today’s rate. This protects the business if the Rand weakens, keeping the payment amount fixed and easier to budget for.

To gain a more in depth understanding of FECs, please refer to our detailed overview here.

Increased Use of FEC’s by SME’s

Traditionally, large corporates made the most use of Forward Exchange Contracts (FECs). Today, small and medium-sized enterprises (SMEs) are also adopting them more widely. With tighter margins and greater exposure to currency fluctuations, SMEs are recognising that hedging can protect earnings and provide more certainty in financial planning.

“Timing is Everything”

Recent trade disruptions, such as new tariffs on South African exports to the United States, have made the timing of currency conversion a strategic consideration.

Businesses are aligning Forward Exchange Contracts (FECs) with payment schedules and contract terms to avoid losses from adverse currency moves. As one article put it, “Timing is everything” when it comes to securing profitability in international trade.

FECs as ‘Currency Insurance’

Banks often describe Forward Exchange Contracts (FECs) as insurance against currency volatility. Businesses in developed markets frequently use sophisticated foreign exchange strategies, including automated platforms and layered hedging. If overseas suppliers or competitors are securing favourable rates while your business is exposed to Rand volatility, you’re at a pricing disadvantage. They can offer more stable quotes, absorb shocks better, and plan long-term. Without a proactive FEC strategy, your cost base may be more volatile, making it harder to compete globally.

What This Means for You

If your business trades across borders, these trends suggest it’s time to:

• Reassess your foreign exchange exposure regularly
• Align FECs with operational cash flows
• Educate internal stakeholders on the strategic value of hedging
• Work with your foreign exchange partner to tailor contracts to your needs

Align your FEC maturity dates with when you actually need to pay or receive foreign currency. For example: If your supplier invoice is due in 60 days, book an FEC for that exact date. This ensures you don’t end up converting currency at spot rates due to timing mismatches.

Set your annual or quarterly budget rate for key currencies (e.g., USD/ZAR), then use FECs to lock in that rate for known exposures. This gives you exchange rate protection through:

• Predictable costs
• Easier pricing decisions
• Confidence in your profit margins

Layered Hedging Strategy

Instead of hedging 100% of your exposure at once, break it into smaller chunks:

• Hedge 30% now, 30% next month, and the rest closer to the payment date.

This helps smooth out rate fluctuations and avoids locking in a bad rate for the entire amount. Think of it as Dollar-cost averaging for currency risk.

• Always keep records of your trade documents (invoices, contracts) to justify your FECs.
• Work with a partner who understands an SME’s needs.
• Review your FX exposure monthly with your dedicated Corporate Dealer, don’t wait for surprises.

We help our clients build a forward-thinking FEC strategy that fits the business size and risk profile. Interested in monitoring exchange rates for your business? Set up a Target Rate Alert to stay informed when the market reaches your preferred level.