The countries of Norway and Sweden are located in northern Europe, but they do not use the euro as their native currency, each country uses its own currency. In the past, both of these countries as well as Denmark shared a common currency known as the krona, or crown. Even though this cross-border monetary union has dissolved and each country uses its own currency, they are still called crowns. The names of each country’s currency may sound similar, but their values are different.

According to the 2022 Triennial Central Bank Survey conducted by the Bank for International Settlements, the Norwegian and Swedish currencies are the 11th and 13th most traded currencies in the world.   

Trading Norwegian krone (NOK) and Swedish krona (SEK) futures allows market participants to trade and hedge their Scandinavian currency price risk exposure. We have a suite of Scandi futures, including Norwegian krone/U.S. dollar, Swedish krona/U.S. Dollar, Euro/Norwegian krone and Euro/Swedish krona futures contracts.

Let’s say that an exporter will be exposed to the FX rate between the Norwegian krone and the U.S. dollar in September. The exporter expects to receive NOK 150,000,000 in December, which he will wish to convert to USD. Thus, he has a three-month period of uncertainty relating to FX risk. The FX risk can be hedged with NOK/USD futures.

The FX risk exposure can be hedged by selling NOK/ USD futures contracts. Selling these futures will kick off the hedge, which means that they can be bought back to close out the position. By hedging the difference between the price paid to open the position and the closing price, this creates a futures payoff for the exporter.

The contract size of our NOK/USD futures contract is 2,000,000. Therefore, to hedge the FX exposure, the exporter needs to sell 75 futures contracts.

# NOK/USD Futures = Expected Income (NOK) ÷ Futures Contract Size

# NOK/USD Futures = 150,000,000 NOK ÷ 2,000,000 NOK

# NOK/USD Futures = 75 Lots

Of course, global currencies are prone to either depreciate or appreciate in value. Let’s look at what might happen in both scenarios.

An appreciation of the USD versus the NOK can also be viewed as a decrease in the value of NOK, measured in USD. Assume that the price of the December futures contract goes from USD .09630 per NOK to USD .09450 per NOK, or an appreciation of 2.1%.  

In the cash market, NOK 14,175,000 has a USD value of USD 14,745,000, which is less than expected had the exchange rate not changed. This lower outcome is offset by a gain made on the FX futures position. Overall, the cashflow has been maintained in line with expectations, which is the purpose of the hedging strategy.

A depreciation of the USD versus the NOK can also be viewed as an increase in the value of NOK, measured in USD. In this example, assume a depreciation of the USD such that the price of the September futures contract goes from USD .09630 per NOK to USD .09830 per NOK.  

In the cash market, NOK 150,000,000 in this scenario has a value of USD 14,745,000. This is higher than expected had the exchange rate not changed. The NOK/USD futures hedge position records a loss of USD 300,000, offsetting the gain but maintaining the overall return from the transaction.

This FX hedging strategy is also applicable in cases where an exporter has the FX exposure in NOK arising from positions in financial derivatives denominated in different currencies.

Trading in the NOK/USD futures terminates on the second business day prior to the third Wednesday of the contract month. 

The volatility in foreign exchange markets can be an unpredictable factor that firms are looking to hedge. By hedging foreign exchange risk, companies can stabilize future cash flows, which in turn creates greater confidence in business performance. 

Our suite of FX Scandi futures includes several key foreign exchange futures contracts and these provide participants with effective hedging tools to manage growing risks in the sector.