A company may face currency risk especially at times of volatile exchange rates. To mitigate this risk, it could resort to a variety of means and tools, among the most efficient and effective of which is a currency futures contract. There is a relationship (known as the hedge ratio) between the currency exposure to be hedged and and the size of currency futures to be used. The purpose of a hedge will be to offset adverse rate fluctuations in one market with an equal and opposite exposure in the hedging tool (futures contracts).

Let’s suppose, for instance, that a company based in Europe, with its financial statements being denominated in euro, has inked a contract to sell goods worth $10 million for future delivery (after three months). This company is exposed to the risk of a depreciating dollar against euro. A viable solution might be to sell dollar futures to mitigate the risk exposure. If the size of a futures contract is $100,000, the hedge ratio (HR) will be:

HR =  value of risk exposure ÷ futures contract size
HR = $10 million ÷ $100,000
HR = 100 futures contracts

If on the contrary the company is expecting to pay BRL 20 million in the future against Brazilian raw materials procured for its operations, and is afraid of an appreciating exchange rate, it could do just the opposite. I may buy Brazilian real (BRL) futures to address the FX risk. If the size of a futures contract is BRL 200,000, the hedge ratio can be calculated as:

HR = BRL 20 million ÷ BRL 200,000
HR = 100 futures contracts