How Corporates Use Derivatives

A non-financial company considers derivatives when it looks for ways to limit losses from market moves on foreign-currency receipts and payments, floating-rate borrowing, or raw material purchases. A company that files an annual securities report also has to describe its derivative transactions in the notes to its financial statements. A financial institution explains the risks, and whether the contract can limit losses, to a customer who contracts for that purpose.

Three risks that arise from business transactions

A non-financial company can suffer losses from market moves on exports and imports in foreign currencies, on loans at a floating rate, and on purchases of raw materials. Consider a hypothetical example in which an importer has to pay USD 1 million in three months. At 150 yen per dollar that is 150 million yen, but if the yen weakens to 160 yen, it has to pay 160 million yen, 10 million yen more.

In Japan's trade in the first half of 2026, transactions not denominated in yen made up more than half of both exports and imports by value. For exports, 51.1% were in US dollars and 34.7% in yen; for imports, 67.5% were in US dollars and 24.7% in yen¹.

To limit such losses, companies take derivative positions opposite to the transactions they already have. This is called hedging. A hedge is a trade that takes a position in futures or options opposite to the underlying asset, to protect against price moves in assets you hold or plan to hold². The disclosure example for a manufacturer published by the Accounting Standards Board of Japan (ASBJ) also shows foreign-currency receivables hedged with FX forwards and floating-rate borrowings hedged with interest rate swaps³. What Is a Derivative? explains derivatives from the basics.

Besides hedging, derivatives are also used for speculation and arbitrage.

Hedging the currency risk of exports and imports with FX forwards

An FX forward lets a company fix today the rate at which it will convert a future foreign-currency receipt or payment into yen. Consider a hypothetical example in which Company X will receive export proceeds of USD 1 million in three months and enters into an FX forward with a bank to sell USD 1 million at 150 yen per dollar. Whatever the rate is in three months, Company X can convert the USD 1 million into 150 million yen. The dollars and yen that pass among the three parties are shown in Figure 1.

Figure description

Figure 1 shows the flows among the three parties as Company X receives its export proceeds and exchanges dollars and yen under the FX forward. The dollars received from the export customer go to the bank under the FX forward, and Company X receives yen in return. This flow does not change when the rate moves.

If the yen strengthens to 140 yen, the amount received without the FX forward falls by 10 million yen, but with the FX forward Company X still receives 150 million yen. If the yen weakens to 160 yen, on the other hand, Company X receives only 150 million yen, when it could have received 160 million yen without the FX forward. For an importer, the direction is reversed: it enters into an FX forward to buy dollars, which protects it against higher payments when the yen weakens. A derivative product is a contract that sets in advance a right or obligation to trade foreign currency, interest rates, or similar items at a fixed price or on other set terms. It is meant to prepare for future moves in exchange rates and interest rates⁴.

In the ASBJ disclosure example, the company hedges with FX forwards the amount left after deducting payables in the same currency from its foreign-currency receivables. It also enters into FX forwards, depending on exchange rate conditions and for up to six months ahead, for receivables that are expected with certainty to arise from planned exports³.

Hedging the interest rate risk of floating-rate loans with interest rate swaps

An interest rate swap is a trade in which, on the same notional amount, one party pays a fixed rate and the other pays a floating rate⁵. A company that borrows at a floating rate can bring its net payments to the level of a fixed rate by entering into an interest rate swap in which it receives the same benchmark rate as the loan and pays a fixed rate. Consider a hypothetical example in which Company Y has borrowed 10 billion yen for five years at a floating rate, and the loan rate is the benchmark rate itself.

Company Y enters into a five-year interest rate swap with a notional amount of 10 billion yen. It pays a 1% fixed rate and receives a floating rate based on the same benchmark as the loan. Interest is paid once a year and is calculated for the full year using that year's benchmark rate. The direction of the payments each year is shown in Figure 2.

Figure description

Figure 2 shows the flows among the three parties as Company Y pays and receives interest on the loan and the swap. It pays the lender loan interest, and pays the swap party fixed interest and receives floating interest from it. The fixed interest is 100 million yen whatever the benchmark rate, while the other two amounts change with it.

If the benchmark rate rises to 2.0%, Company Y would pay 200 million yen a year without the swap, but the 200 million yen received on the swap covers the loan interest, and its net payment stays at 100 million yen. If the benchmark rate falls to 0.5%, on the other hand, Company Y would have paid only 50 million yen a year without the swap, but it pays a net 100 million yen, 50 million yen more.

Hedging raw material price risk with commodity futures

Commodity futures are futures contracts on items such as agricultural products, minerals, and electricity, in which the price and quantity are fixed in advance⁶. When a company that plans to buy raw materials buys commodity futures ahead of time, this is called a long hedge². With a long hedge, the gain on the futures offsets the higher purchase cost when raw material prices rise. With commodity futures, manufacturers can protect against rises in raw material prices and sellers can protect against falls in prices when they sell⁷.

Consider a hypothetical example in which manufacturer Company Z plans to buy 1,000 tons of raw material in three months and buys futures for 1,000 tons now at 50,000 yen a ton. To keep the example simple, assume that on the purchase date in three months, the price of the physical material and the futures price are the same.

The gain or loss on the futures is the difference between the purchase price and the price at which Company Z sells the futures on the purchase date to close the position (an offsetting trade), multiplied by 1,000 tons. A futures position can be closed by making an offsetting trade by the last trading day and settling the price difference⁶. If the raw material rises to 60,000 yen, the purchase cost rises by 10 million yen, but the 10 million yen gain on the futures offsets it. If it falls to 40,000 yen, the purchase cost falls by 10 million yen, but the 10 million yen loss on the futures offsets that.

A seller does the opposite and uses a short hedge, selling futures in advance². One example is producer organizations for rice and adzuki beans that sell futures in advance and make offsetting trades for the amount they sell in the physical market⁷.

Gains given up and obligations that remain

Hedging limits losses when the market moves against you, but in exchange, a loss on the derivative also cancels out gains when the market moves in your favor. In Company X's example, the yen may weaken to 160 yen per dollar. The amount received then stays at the 150 million yen fixed by the FX forward, 10 million yen less than without it. In Company Y's and Company Z's examples too, when rates or prices fall, the net payment or cost is higher than without the hedge. Changes in exchange rates or interest rates can also cause customers to lose money on derivative products⁴.

Even if the actual business turns out smaller than the hedge, the derivative obligation remains as it is. For example, if Company X's exports fall to USD 500,000, its obligation under the FX forward to sell USD 1 million at 150 yen per dollar does not go away. Suppose it buys the missing USD 500,000 at that day's rate and delivers them. At 160 yen, it pays 80 million yen for dollars that it then sells for 75 million yen under the FX forward, a loss of 5 million yen. At 140 yen, it pays 70 million yen for them and sells them for 75 million yen, a gain of 5 million yen.

As a rule, derivative products cannot be canceled before maturity, and a cancellation settlement payment may be required if the customer cancels for its own reasons⁴.

Disclosure in the notes to the financial statements

In the notes to their financial statements, companies that file annual securities reports describe the nature, risks, and purpose of the derivative transactions they use, except for immaterial items. Certain companies that issue securities file an annual securities report for each fiscal year¹¹. The notes to the financial statements cover matters such as the policy for financial instruments, their nature and risks, and the risk management system¹². For derivative transactions, the notes describe the purpose of the transactions in addition to their nature and risks¹³.

The ASBJ disclosure example for a manufacturer shows, as an example, a policy of using derivatives only to avoid risk and not for speculative trading. The same example describes an arrangement in which internal rules set trading authority and limits, the finance department executes trades, and the accounting department records them and reconciles balances with counterparties¹⁴. The ASBJ notes, however, that the disclosure examples are meant to aid understanding and that each company should prepare its notes to fit its own circumstances¹⁴.

How hedge accounting is applied is covered in Hedge Accounting Basics.

Notes

1. Ministry of Finance, "貿易取引通貨別比率（令和８年上半期）" (Share of currency in trade, first half of 2026, in Japanese; July 30, 2026), page 1, the "（地域別）" (By Geographic Area or Economic bloc) table, the "世界" (WORLD) row for "日本からの輸出" (Exports from Japan) and "日本への輸入" (Imports to Japan). The shares are shares by value (page 2, "（注）" (Notes) 1 and 2). English version: "Share of Currency in Trade (Jan-Jun, 2026)". ↩

2. Japan Exchange Group, "ヘッジ取引（用語集）" (Hedging, glossary, in Japanese). ↩ ↩² ↩³

3. Accounting Standards Board of Japan, "金融商品の時価等の開示に関する適用指針" (Implementation Guidance on Disclosures about Fair Value of Financial Instruments, ASBJ Guidance No. 19, in Japanese), "参考（開示例）" (Reference: disclosure examples), "2. 製造業" (2. Manufacturing), 1(2) "金融商品の内容及びそのリスク" (Nature and risks of financial instruments) and 1(3)② "市場リスク（為替や金利等の変動リスク）の管理" (Management of market risk: risk of changes in exchange rates, interest rates and so on). ↩ ↩²

4. Financial Services Agency, "デリバティブ商品を契約するときのポイント" (Points to check when entering into a derivative product, in Japanese), front page, "説明事項（主な例）" (Items to be explained: main examples). ↩ ↩² ↩³

5. Japan Exchange Group, "スワップ（用語集）" (Swap, glossary, in Japanese). ↩

6. Ministry of Agriculture, Forestry and Fisheries, "商品先物取引とは" (What are commodity futures?, in Japanese), the opening description, "先物取引の仕組み" (How futures trading works), and "先物市場の役割" (The role of futures markets) (イ) "価格変動リスクの抑制（ヘッジ）機能" (The function of limiting price risk: hedging). ↩ ↩²

7. The same document, "Q＆A", Q4. ↩ ↩²

8. Financial Services Agency, "デリバティブ商品を契約するときのポイント" (in Japanese), front page, the first item of "金融庁からのおしらせ" (Notice from the Financial Services Agency), the "【例えば】" (for example) part. ↩

9. The same document, back page, the first item of "販売後のフォローアップ" (Follow-up after sale). ↩

10. Financial Services Agency, "デリバティブ商品を契約するときのポイント" (in Japanese), front page, the opening sentence of "金融庁からのおしらせ" (Notice from the Financial Services Agency), which says the rules and points of focus are set by the Financial Instruments and Exchange Act and the Financial Services Agency's supervisory guidelines, and the third item. ↩

11. "金融商品取引法" (Financial Instruments and Exchange Act, in Japanese; English translation: Japanese Law Translation), Article 24, paragraph 1. ↩

12. "財務諸表等の用語、様式及び作成方法に関する規則" (Regulation on Terminology, Forms, and Preparation Methods of Financial Statements, in Japanese; English translation: Japanese Law Translation), Article 1, paragraph 1 (applies to financial documents submitted under Article 24, paragraph 1 of the Financial Instruments and Exchange Act and other provisions) and Article 8-6-2, paragraph 1, item 1 (under the proviso of that paragraph, immaterial items may be omitted). ↩

13. Accounting Standards Board of Japan, "金融商品の時価等の開示に関する適用指針" (in Japanese), paragraph 3, the lead-in sentence (omission of immaterial items) and (2)③. ↩

14. Accounting Standards Board of Japan, "金融商品の時価等の開示に関する適用指針" (in Japanese), "参考（開示例）" (Reference: disclosure examples), the opening explanation, and "2. 製造業" (2. Manufacturing) 1(1) "金融商品に対する取組方針" (Policy for financial instruments) and 1(3)②. ↩ ↩²