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The difficulty of hedging the FX risk associated with bids and tenders is the lack of certainty of winning the contract in a competitive situation.

 
When it is decided to submit a bid or tender at a fixed price in foreign currency, an economic exposure is incurred. The risk is that the FX rate will move against the exporter and erode profit margins.
 

Some exporters include a contingency in the price to absorb adverse fluctuations and concede them as discounts nearer to the date of contract signature. Others may insert a currency fluctuation adjustment clause in the bid to adjust the price up or down, wholly or partly as the FX conversion rate moves.
 

Bids and tenders hedged by Forward FX contracts

The advantage of using the Forward FX contract to hedge an economic exposure can be demonstrated in an example:
 

An exporter tenders for an export contract total value of US$200,000.
Tender submission date: 1 January
Competition from USA and other coutries
 

Tender Validity:  1-month (1 February)
Delivery of goods: 1 April
Payment: 1-month after delivery (1 May)
 

If the exporter chose to hedge using a Forward FX contract, the deal would be to sell US$200,000 forward four months from 1 January to 1 May. The rate of exchange obtained in the deal would be used to convert domestic prices to the foreign currency.
 

This would be a good hedge as long as the contract was won on the terms of the bid.
 

If the contract was won on negotiated terms that reduced the value this would require the Forward FX contract to be adjusted appropriately. It would nevertheless still be a substantial hedge.
 

On the other hand, if the contract was lost to the competition, instead of a hedged position, the exporter would have an open short position in US$ created by the Forward FX contract.
 

To eliminate this exposure the exporter would have to close out the Forward FX contract at the current Spot Rate. Depending how FX rates had moved during the validity of the tender, there would be either a net gain or a net loss.