Natural hedging: matching foreign receipts against payments before you trade

A surprising number of Australian businesses sell US dollars to their bank on a Tuesday and buy them back on the Thursday. The receipt from a customer in Texas lands, gets swept into AUD because that is what the account is set up to do, and two days later a supplier invoice from Shenzhen goes out in USD, converted back at a slightly worse rate. Nobody planned it. Nobody notices it. The bank does, because it earned a margin on both legs.

That is the simplest failure of natural hedging, and it is more common than any of the sophisticated ones. Before you put a single forward contract on, the first question is how much of your foreign-currency exposure cancels itself out. For many exporters who also import, and for importers with any offshore revenue at all, the answer is "more than the hedge programme assumes."

This piece covers how to measure that offset honestly, where it works and where it quietly does not, and how to build a hedge programme around the net position rather than the gross one.

What a natural hedge actually is

A natural hedge exists when you have foreign-currency inflows and outflows in the same currency, of similar size, at similar times. A rise or fall in the exchange rate moves both in AUD terms, in opposite directions, and the effects largely cancel. You have reduced your exposure without a contract, a counterparty or a credit line.

Three conditions have to hold, and most of the mistakes in this area come from assuming one of them when it is not there.

The first is currency. USD receipts offset USD payments. They do not offset EUR payments, however correlated the two have been over the past year. Correlation between currency pairs is a statistical observation, not a contractual one, and it tends to break down in exactly the stress periods when you most need it to hold. In March 2020 the relationships many treasurers had relied on for years moved apart within days.

The second is timing. A US$2 million receipt in March does not hedge a US$2 million payment in October. For seven months you are exposed on the receipt, and when it arrives you are holding currency you do not need yet. Timing is where natural hedges leak most of their value, and it is the condition finance teams are most tempted to wave through.

The third is certainty. A signed supplier contract with fixed payment dates is a firm obligation. A sales forecast for a customer who has bought from you for two years but has no purchase order out is something else. Netting a firm payment against a soft receipt gives you a number that looks hedged on the spreadsheet and is not.

When all three hold, the natural hedge is the cheapest risk management you will ever do. When one fails, you have something that resembles a hedge and behaves like an open position.

Why businesses miss the offset

Most of the businesses we see with unused natural hedges are not careless. The offset is invisible because of how the business is organised.

Receivables and payables usually sit with different people. Sales knows what the overseas customers owe and when. Procurement or operations knows what the suppliers are owed. The finance team may see both in the ledger, but the hedge decisions get made per transaction: a big supplier order comes through, someone books a forward to buy USD against it, and the forecast of incoming USD from a distributor is never part of the conversation.

Bank account structure makes it worse. An AUD-only operating account forces every foreign receipt to convert on arrival. There is nowhere for the dollars to sit, so they get sold at whatever rate and margin the bank applies to inward payments, which is usually not the rate you would negotiate if you rang the dealing desk.

Then there is the hedge policy itself. A policy that says "hedge 50 to 75 per cent of forecast USD payments over 12 months" and separately "hedge 50 to 75 per cent of forecast USD receipts" will, if followed faithfully, produce forward sales and forward purchases of the same currency for the same months. The net position may be sensible. The gross notional is double what it needs to be, and every one of those contracts carries a spread and consumes credit capacity.

Measuring the net position honestly

The work here is not difficult, but it has to be done month by month rather than as an annual total. Annual figures hide the timing problem entirely.

Start with a 12-month schedule by currency. For each month, list:

• Firm USD receipts: invoiced amounts due from customers, adjusted for their actual payment behaviour rather than their stated terms
• Forecast USD receipts: expected sales not yet invoiced, with a confidence haircut
• Firm USD payments: supplier invoices, purchase orders and contracted payments
• Forecast USD payments: expected purchases not yet committed

The haircut on forecast receipts matters more than people expect. If a customer historically pays on day 75 against 60-day terms, model day 75. If a distributor's orders have varied 30 per cent either side of budget over the past three years, do not net the full budget figure against your fixed supplier commitments. A reasonable starting point is to count firm receipts at 100 per cent, forecast receipts at 50 to 70 per cent depending on the customer's history, and forecast payments at a higher ratio than forecast receipts, because businesses are usually better at predicting what they will spend than what they will collect.

Then look at the monthly net figure and the running cumulative balance. The cumulative line tells you whether you can actually hold currency from a receipt month through to a payment month without running dry, and how large a USD balance you would carry at peak.

A worked example

Take a Brisbane manufacturer of components for mining equipment. It exports to customers in Chile and the United States, invoiced in USD, and buys castings and hydraulic assemblies from American and Asian suppliers, also in USD.

Annual forecast USD receipts are US$9.6 million. Annual USD payments are US$6.0 million. The receipts come in lumps, because shipments go quarterly on 60-day terms. The payments are steady at roughly US$500,000 a month.

By quarter, the picture looks like this:

Quarter	USD receipts	USD payments	Net USD
Q1	1.8m	1.5m	+0.3m
Q2	2.6m	1.5m	+1.1m
Q3	2.2m	1.5m	+0.7m
Q4	3.0m	1.5m	+1.5m
Total	9.6m	6.0m	+3.6m

The business is structurally long USD by about US$3.6 million a year. That is its real exposure: a stronger AUD hurts it, by US$3.6 million worth of conversion rather than US$9.6 million.

Until last year it ran the two sides separately. It sold USD forward against receipts and bought USD forward against payments, under a policy that hedged both at around 75 per cent. That meant roughly US$7.2 million of forward sales and US$4.5 million of forward purchases, US$11.7 million of contracts to manage a net exposure of US$2.7 million at the same ratio. Every unhedged dollar on each side was also converted at spot, so all US$15.6 million of flows crossed the AUD/USD rate one way or the other.

Assume its bank was taking an all-in margin of 0.4 per cent per conversion, which is not unusual for a business of this size dealing through a relationship manager. On US$15.6 million of conversions, that is about US$62,400 a year. Netting first and converting only the US$3.6 million surplus cuts it to about US$14,400. The difference, roughly US$48,000, is around A$73,000 at an AUD/USD rate of 0.66. That is before counting the credit line it frees up, or the hours spent booking and settling contracts that cancelled each other out.

The quarterly view flatters the result, though. Look inside Q1. Payments of US$500,000 go out in January, February and March. The US$1.8 million of receipts arrives mostly in March, when the November shipment is paid. So for the first two months of the quarter the business is paying USD it has not yet received. If it starts January with no USD balance, it has to buy about US$1 million at spot or under forwards before the receipt lands, and then sell the surplus once it does.

There are three practical answers:

1. Carry a USD buffer in a foreign currency account sized to the largest cumulative shortfall in the year. Here that is around US$1 million, built up from the Q4 surplus rather than sold.
2. Use FX swaps to bridge the gap: buy USD now against selling it back on the date the receipt is expected, which costs the interest differential and a small margin rather than a full spread both ways.
3. Accept the timing gap on the smaller months and hedge only the material shortfalls.

Most businesses of this shape end up with the first option, topped up by the second when a large customer pays late. The buffer has an opportunity cost (that US$1 million is not earning what it would in an offset account against AUD debt), but it is usually smaller than the spread it saves.

Multi-currency accounts are the plumbing

None of this works if every receipt auto-converts on arrival. The single most useful step for most businesses with two-way flows is a foreign currency account (FCA) in each currency where both receipts and payments are material.

Ask the bank three questions before you open one.

What does it pay on credit balances? Many transactional FCAs pay nothing. That may be acceptable for a working balance that turns over monthly. For a structural buffer of US$1 million or more, it is worth asking for a rate or a separate interest-bearing account.

What does it charge to pay out of the account? Some banks charge the same telegraphic transfer fees regardless, but a few apply a conversion margin even when you pay USD out of a USD balance, if the payment is set up through an AUD-denominated payments platform. Check this with a test payment before you rely on the account.

Can inward payments be directed to it automatically? Your customers will keep paying whatever account details are on the invoice. Changing the remittance instructions takes a round of communication and usually a few months before everyone has caught up. Some will pay into the old account for a year regardless.

Online payment providers and fintechs offer multi-currency wallets that are often cheaper than the major banks. They are a legitimate option for smaller balances. For a business carrying seven-figure USD balances, read the terms on how client funds are held and what protection applies if the provider fails; it is not the same as an authorised deposit-taking institution.

How natural hedging fits the hedge policy

The cleanest structure is to define the hedgeable exposure as the net position by currency and month, and apply the hedge ratios to that.

In practice the policy needs a few explicit rules.

Netting stays within one currency, USD against USD. No netting of EUR receipts against USD payments, and no "proxy" netting of NZD against AUD flows. If the board wants to consider cross-currency offsets, that should be a separate, deliberate decision with its own limits, not something that creeps in through the netting schedule.

It also stays within a defined window. A common rule is that flows can be netted if they fall within the same calendar month, or within 30 to 45 days of each other. Anything further apart is treated as two separate exposures, hedged separately, with the FCA balance or a swap bridging any gap the business chooses to hold.

Each side gets its own confidence weight. Write the haircuts into the policy so they are not renegotiated every quarter. If forecast receipts count at 60 per cent and forecast payments at 80 per cent, say so.

Reconcile monthly, because natural hedges decay quietly. A big customer switches to AUD invoicing, a supplier is replaced by a local one, and the offset you were counting on disappears. Nobody books anything, so nobody reviews anything. A monthly check of actual net flows against the forecast is the only way to catch it.

The policy should also say what happens when the net position flips. A business that is usually long USD may find itself net short in a quarter with a large capital purchase. If the hedge programme is built around the net, it has to be able to buy as well as sell.

The accounting is easier than you might fear

For balances already on the balance sheet, natural hedging needs no special accounting treatment at all. Under AASB 121, foreign currency monetary items (receivables, payables and cash held in an FCA) are retranslated at the closing rate each reporting date, with the differences going to profit or loss. A US$1 million receivable and a US$1 million payable move by the same AUD amount in opposite directions, and the gains and losses offset in the same line. That is a natural hedge doing exactly what it should, with no documentation required.

Forecast transactions are different. A sale you expect next March is not on the balance sheet, so there is nothing to retranslate and nothing to offset until it is invoiced. That is fine economically, but it means the P&L will not show the natural hedge until both sides are recognised.

AASB 9 does allow a non-derivative financial asset or liability, such as a USD borrowing, to be designated as the hedging instrument for foreign currency risk, which can formalise a natural hedge in hedge accounting terms. Few SMEs need to go there. If you are considering it, it is a conversation for your auditor before year-end, not after.

Tax is its own question. Realised foreign currency gains and losses, including on FCA balances, fall under Division 775 of the Income Tax Assessment Act 1997, and holding currency rather than converting it changes when those gains and losses are realised. The amounts are usually modest for a working balance, but talk to your tax adviser before you start carrying a structural USD position.

Common mistakes

The most common is counting correlation as a hedge. The EUR/USD relationship has been stable for long stretches. It has also moved 15 per cent in a year. If your receipts are in euros and your payments are in US dollars, you have two exposures, not one.

Close behind it is netting across the year. "We receive US$9.6 million and pay US$6.0 million, so we only need to hedge US$3.6 million" is the right annual figure and the wrong operational one. Without a buffer or a bridging mechanism, the timing gaps get filled at spot, and you are back to converting both ways.

The one that does the most damage is treating forecast receipts as firm. Customers delay payment, cancel orders and renegotiate. If you net a soft receipt against a hard payment and the receipt slips, you will be buying USD at short notice, possibly in a market that has moved against you. A sound idea becomes a bad quarter.

Hedging the gross on both sides was covered above, but it is the most expensive of the routine errors and worth a second mention. Two opposing forwards for the same month are not twice as safe. They are the same net position at twice the cost and twice the credit usage.

Some businesses push suppliers into AUD invoicing to "remove" the exposure. The currency risk does not go away. It moves to the supplier, who will price it in, usually generously. If you are also receiving USD, you have just destroyed a natural hedge you were getting for free. Sometimes moving supplier invoicing to USD, where you already receive USD, is the better negotiation.

Last, watch that the FCA balance does not turn into a currency view. A USD buffer sized to cover the next two months of payments is risk management. A USD balance that has grown to six months of payments because nobody wanted to sell at "these levels" is a speculative position. Set a maximum balance in the policy, and sell the excess when it is breached, whatever the rate.

Where to start

If you have never looked at your flows this way, start with the last 12 months of actuals rather than a forecast. Pull every USD receipt and payment from the ledger, bucket them by month, and calculate what your conversions would have been if you had netted within each month. Compare that with what you actually converted. The gap, multiplied by your bank margin, is the cost of not netting. For most businesses with two-way flows it is large enough to justify an FCA and a rewrite of the hedge policy on its own.

Then build the forward-looking schedule, set the haircuts and the netting window, and hedge what is left. The forwards you still need will be fewer, smaller and better matched to the exposure that actually affects your margins.

Natural hedging will not remove the need for a hedge programme in most businesses. What it does is make sure the programme is hedging your real exposure, and that you stop paying the bank twice for dollars you already had.

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David Dowling • 9 October 2026