If your business buys from overseas suppliers, invoices customers in foreign currencies, or operates internationally, exchange rate movements can significantly affect profitability. One of the most common ways to reduce that uncertainty is with a foreign exchange (FX) forward contract.

However, many finance professionals encounter unfamiliar terms after booking their first forward contract, including mark-to-market (MTM), margin, and margin calls. These terms can sound intimidating, but they are simply part of the risk management process that helps ensure both parties can fulfill the agreement.

Understanding how these concepts work allows finance teams to make better treasury decisions, improve cash flow planning, and avoid unnecessary surprises.

What Is a Forward Contract?

A forward contract is an agreement to exchange one currency for another at a predetermined exchange rate on a future date.

Rather than accepting whatever the market rate happens to be when payment is due, you lock in today's exchange rate. This provides certainty for budgeting, forecasting, and financial planning.

Businesses commonly use forward contracts when they have:

• Future supplier payments
• International payroll obligations
• Foreign currency receivables
• Large capital purchases
• Predictable cross-border cash flows

Unlike speculative trading, most corporate forward contracts exist to reduce financial uncertainty rather than generate investment returns.

Many organizations focus on getting the "best" exchange rate. Treasury teams typically focus on something more valuable: eliminating uncertainty. Predictable costs often matter more than achieving the absolute lowest possible rate.

Why Businesses Use Forward Contracts

Foreign exchange markets operate continuously, and exchange rates can change dramatically over weeks or months.

Without protection, currency movements can affect:

• Gross margins
• Product pricing
• Forecast accuracy
• Budget performance
• Cash flow planning

A forward contract converts an uncertain future cost into a known cost today. While you give up the opportunity to benefit if exchange rates move in your favor, you also protect yourself if they move against you.

Example: Locking in Costs Before an Overseas Purchase

Imagine a U.S. manufacturer signs a contract to purchase machinery from Japan for ¥120 million, with payment due in six months.

Today:

• Spot rate: USD/JPY = 145
• Six-month forward rate: 143

The company books a forward contract at 143.

This means the future payment will cost approximately $839,000, regardless of how exchange rates move before settlement.

Six months later, two outcomes are possible:

Scenario A: The yen strengthens

The market rate moves to 135.

Without a forward, the payment would now cost approximately $889,000.

Because the company locked its rate earlier, it still pays approximately $839,000, avoiding an unexpected increase of roughly $50,000.

Scenario B: The yen weakens

The market rate moves to 150.

Without the forward, the payment would cost about $800,000.

The company still settles at the agreed forward rate of 143.

Although it could have benefited from the lower market rate, management had already achieved its primary objective: certainty.

This illustrates an important principle. Forward contracts are designed to reduce risk, not to predict where currencies will move.

What Does Mark-to-Market Mean?

Mark-to-market (MTM) is the process of comparing the value of your forward contract with current market exchange rates.

It answers a simple question:

If this contract were valued today, would it currently be worth more or less than when it was booked?

The answer changes as exchange rates move.

If market rates move in your favor, your contract may be considered "in the money."

If market rates move against you, it may be "out of the money."

Importantly, your agreed exchange rate does not change.

Mark-to-market is simply an ongoing valuation used to measure the contract's current position.

Many businesses mistakenly treat MTM as a profit and loss statement. In reality, it is more like a weather forecast. It tells you where your position stands today, but it does not alter the contract itself.

Why Is a Margin Deposit Required?

Because forward contracts can remain outstanding for several months, providers need protection against significant market movements.

An initial margin, sometimes called a deposit, serves this purpose.

The margin:

• Helps secure the contract
• Reduces counterparty risk
• Is applied toward the final settlement
• Is not an additional fee

The amount required varies depending on factors such as:

• Currency volatility
• Contract size
• Settlement period
• Market conditions
• Financial profile and transaction history

Finance teams should view margin as working capital planning rather than transaction cost.

What Is a Margin Call?

A margin call occurs when adverse market movements reduce the value of the existing margin below the provider's required level.

The provider may request additional funds to maintain the contract until settlement.

A margin call does not necessarily mean:

• The contract has failed
• The business has realized a loss
• The provider expects the trade to default

Instead, it reflects changing market conditions and ensures sufficient collateral remains in place while the contract is active.

If the contract settles normally, margin deposits are credited toward the final settlement amount.

Treasury teams often plan for exchange rate risk but overlook liquidity risk. Even if a hedge performs exactly as intended, temporary margin requirements can affect short-term cash availability. Both risks should be considered together.

Open Forward vs. Closed Forward: What's the Difference?

Closed forwards are well suited to fixed payment obligations, while open forwards allow businesses to draw against the contract during an agreed settlement window.

Common Misunderstandings About Mark-to-Market

"Mark-to-market changes my exchange rate."

It does not. Your agreed forward rate remains fixed throughout the contract.

"A margin call means I've lost money."

Not necessarily.

A margin call reflects the contract's current market valuation. Any gain or loss remains unrealized until the contract is settled or closed.

"The deposit is an extra fee."

The margin deposit is collateral and is applied toward the final settlement, assuming the contract completes as agreed.

"Forward contracts guarantee savings."

No.

They provide certainty, not guaranteed cost reductions. Sometimes the market moves in your favor after booking a forward, and sometimes it does not.

Best Practices for Finance Teams Using Forward Contracts

Match hedges to real business exposures

Use forward contracts to protect committed or highly probable future cash flows rather than speculate on currency movements.

Plan for liquidity

Consider potential margin requirements when forecasting working capital.

Understand settlement timing

Know when payments will be due and how settlement fits into your broader treasury calendar.

Review your FX policy regularly

Document when hedging is appropriate, who approves transactions, and how exposures are measured.

Work with experienced FX specialists

Forward contracts become more valuable when paired with guidance on currency risk, settlement timing, and treasury planning rather than simply booking transactions.

For organizations managing domestic receivables, global payables, and foreign exchange together, an integrated payments platform can also improve visibility across the payment lifecycle. Rather than managing separate banking relationships and disconnected systems, finance teams can automate accounts receivable, accounts payable, international payments, FX execution, reconciliation, and treasury reporting through one connected platform that integrates with their ERP. This approach helps reduce manual work while giving treasury teams a more complete view of cash flow and currency exposure.

Key Takeaways

• Forward contracts lock in exchange rates to reduce FX uncertainty.
• Mark-to-market measures the current value of a forward contract but does not change the agreed exchange rate.
• Margin deposits are security, not fees, and are credited toward settlement.
• Margin calls help manage market risk and do not necessarily indicate a realized loss.
• Treasury planning should consider both exchange rate risk and short-term liquidity.
• Forward contracts work best as part of a broader foreign exchange risk management strategy.

Forward contracts remain one of the most effective tools for managing foreign exchange risk because they replace uncertainty with predictability. Understanding concepts such as mark-to-market, margin deposits, and margin calls helps finance teams use these instruments with greater confidence and avoid unnecessary surprises.

As international operations grow, many organizations also discover that managing foreign exchange is only one part of a broader payments strategy. Bringing together accounts receivable, accounts payable, domestic and international payments, treasury, and FX into one connected platform can improve visibility, streamline operations, and reduce manual work across the entire payment lifecycle.

If your finance team is evaluating ways to simplify global payments, reduce payment failures, automate accounts payable and treasury workflows, or build a more effective foreign exchange risk management strategy, a conversation with Ascendant can help you understand which approaches best fit your environment. Whether you ultimately work with us or not, understanding the available options can help you build a stronger payments strategy.

Frequently Asked Questions

What is mark-to-market in a forward contract?

Mark-to-market is the ongoing valuation of a forward contract based on current market exchange rates. It shows whether the contract is currently in or out of the money but does not change the agreed exchange rate.

Why do FX providers require margin?

Margin protects both parties against significant market movements during the life of the contract. It serves as collateral and is applied toward the final settlement rather than being charged as a fee.

Does a margin call mean my business has lost money?

No. A margin call reflects changes in the contract's current market value and may require additional collateral. Any gain or loss generally remains unrealized until settlement or early close-out.

Can I cancel a forward contract?

Forward contracts are binding agreements. If a contract needs to be amended or cancelled before settlement, it is typically closed out at the prevailing market rate, which may result in a gain or a cost depending on market conditions.

Should every business use forward contracts?

Not necessarily. They are most appropriate for businesses with predictable foreign currency exposures that want greater certainty over future cash flows and budgeting.