You Are Selling FX Certainty for Free

Quote in shillings while your costs sit in dollars and you have not just set a price. You have written an option. The customer holds the right to buy at today’s rate for as long as your quote, your price list or your contract stays open, and they will use it hardest on the day it costs you most.

That is not a pricing decision. It is an insurance contract, and you wrote it at a premium of zero.

It never appears as a line item, which is why it survives audit, board packs and diligence. It shows up later as margin that “compressed.”

Why these three models

This piece runs the Wire Model. Score the features of the decision, route them to a small ensemble of formal models, then make the ensemble produce dated actions. The scores that decided the routing:

• Volatility with jumps rather than drift (0.9). In a managed float the rate does not wander. It is repriced by directive, on a date, in a step.
• Commitment length (0.85). Every extra month of validity or contract term multiplies the same exposure.
• Selection into the contract (0.8). Buyers choose whether to take your fixed price, and the ones who want it most are the ones for whom it is worth most.
• Lumpy repricing (0.75). You will not raise prices smoothly. You will hold, hold, then move in one visible jump.
• Strategic bargaining (0.5). Real, and too low to earn a card.

That routes to option value under volatility (what you gave away is worth), adverse selection and certification (who takes it), and threshold and cascade (what breaks when you finally move). On the outcome-type map those are random, equilibrium and complex. Three distinct types, so their errors do not lean the same way.

Regime-switching is folded into the first card rather than shipped as a fourth. It changes the volatility input, not the decision, and a separate card would have bought the reader no lever. The behavioural layer sits inside the third card, where holding a price too long belongs, and in the blind spot.

The framework: you sold something that has a bid

1. The price of the certainty you handed over

Start with the fact that this thing trades. In April 2025, turnover in over-the-counter foreign exchange markets ran at $9.6 trillion a day, up 28 percent on three years earlier, and turnover in FX options more than doubled over the same period.¹ The dollar sits on one side of roughly 90 percent of all trades, and forwards and swaps are used mainly to hedge currency risk.²

So the market is enormous, and it will quote you a price for exactly the certainty you have been handing to customers for nothing.

Your cost base is dollar-shaped even when no dollar leaves your account. Gopinath and co-authors show that the dollar exchange rate, not the bilateral rate between your currency and your supplier’s, dominates price pass-through and trade elasticities, and that a 1 percent dollar appreciation against all other currencies predicts a 0.6 percent fall within a year in the volume of trade between countries in the rest of the world.³ Your imported input is priced by a supplier who is not in your country and does not care which currency you invoice in.

An option’s value rises with the volatility of the underlying and with time to expiry. Both inputs run larger here than founders assume, because the movement is not gradual.

Two examples from the last three years, both administrative acts rather than market drift:

• Ethiopia. The National Bank’s Foreign Exchange Directive FXD/01/2024 instructed banks to buy and sell foreign currency from clients and among themselves at freely negotiated rates. Effective 29 July 2024.⁴
• Malawi. On 9 November 2023 the Reserve Bank moved the selling rate from MWK 1,180 to MWK 1,700 to the dollar and began authorising dealer banks to negotiate rates freely. One day, 44 percent.⁵

Airtel Africa, a company with a treasury function and audited accounts, booked $37 million as an exceptional foreign exchange loss on that single Malawi step, and a further $169 million translation loss through other comprehensive income on its Malawi assets for the year.⁵ A group that size could not sidestep it. A founder holding a six-month fixed price list is holding the same exposure with none of the balance sheet.

The practical part: this is purchasable. TCX quotes hedges in frontier currencies including the kwacha, cedi, shilling and birr, with pricing available out to thirty-year maturities.⁶ A rough working number for what a year of fixed pricing costs is the gap between your central bank’s policy rate and the dollar rate. Ghana’s policy rate stood at 21.5 percent in September 2025.⁷ That is the order of magnitude you are giving away on a twelve-month commitment, and an indicative quote takes an afternoon.

Option value under volatility, the pricing lens

Assumes: the written option has a positive value scaling with variance and tenor, and someone will quote it.

Fits because: jump volatility scored 0.9 and commitment length 0.85.

Breaks when: the move is already in the forward. If everyone expects the devaluation, the hedge is priced at it, and buying just books the loss earlier.

Counteracts: treating a fixed price as free goodwill.

May reinforce: over-hedging, and paying premium on exposure a shorter quote would have removed.

2. Who says yes to your fixed price

Now ask which customer takes the twelve-month fixed quote and which takes the indexed one.

The buyer knows their own exposure better than you do. A distributor whose costs move with the dollar has every reason to lock your price and let you carry the variance. A buyer with stable local costs is indifferent and takes whichever number is lower today. So the fixed-price offer sorts your pipeline, and it sorts it against you: the customers who most want it are the ones from whom you should be collecting a premium.

Signing also closes your legal exits. Under the UNIDROIT Principles of International Commercial Contracts, a party whose performance becomes more onerous is nevertheless bound to perform, and the hardship route out requires, among other conditions, that the risk of the events was not assumed by the disadvantaged party.⁸ A founder who signed a fixed price in a currency with a public devaluation history assumed the risk. The contract you thought was a commercial courtesy is the document that gets read back to you.

The inversion is where the money is. Certainty you can prove you have bought becomes a product you can sell, at a margin, to the customer who wants it. Yellow, a Malawian solar and device company distributing through more than 1,000 agents, ran the version of this problem that sits on the funding side. Its CFO puts it plainly: the company had a significant amount of unhedged hard currency on its balance sheet a few years back, and after watching depreciation hit similar companies elsewhere, decided any new dollar debt would have to be indexed to the local currency, because “if something goes wrong by a little bit, it has such a massively outsized, and potentially destructive impact on our business, and ultimately our customers.”⁹

Hedged, a fixed price is a premium product. Unhedged, it is a donation with a signature on it.

Adverse selection and certification, the sorting lens

Assumes: buyers know their own currency exposure and choose the contract that suits it.

Fits because: selection into the contract scored 0.8, and the offer is voluntary on both sides.

Breaks when: the buyer has no choice. A regulated tariff or a single-supplier framework removes selection, and the sorting story explains nothing.

Counteracts: reading enthusiasm for your quote as product-market fit.

May reinforce: suspicion of your best accounts, and clause-heavy contracts costing more in sales cycle than they save.

3. What breaks when you finally reprice

The loss accrues quietly and gets paid all at once, because prices do not move continuously.

Nakamura and Steinsson, working through the underlying US consumer price microdata, find the median frequency of non-sale price change is 9 to 12 percent a month for identical items, implying that regular prices hold for roughly 8 to 11 months before they move.¹⁰ That is a rich, competitive, low-inflation market. Firms still sit on a price for the better part of a year and then jump.

Two thresholds govern what happens next. Yours is the point where margin damage outweighs the discomfort of the conversation. Your customer’s is the number past which they call your competitor. Cross yours late and you arrive with one large increase instead of four small ones, which is exactly the shape that trips theirs. Churn then moves through a category by conversation, because buyers talk and a repricing letter is a shareable object.

The cascade runs in your favour if you get the sequence right. Small, scheduled, rule-based moves cross almost nobody’s threshold. One annual reckoning crosses many at once.

Note that the option runs both directions, and this is the part founders skip. Ghana’s cedi appreciated 21.0 percent against the dollar in the year to 12 September 2025, one of the strongest currency performances in the world.⁷ A founder who dollar-indexed every cedi contract in January 2025 spent that year raising prices into a market where the dollar was falling, and handed a competitor the easiest displacement pitch available. What you are removing is variance, not a direction. Say that to yourself before you index everything.

Threshold and cascade, the repricing lens

Assumes: customers tolerate small moves and react discontinuously past a personal limit.

Fits because: lumpy repricing scored 0.75, and the empirical duration of a held price is measured in months.

Breaks when: the price is a small share of the customer’s total cost. Then there is no threshold to cross and you were free to reprice all along.

Counteracts: the instinct to absorb one more quarter.

May reinforce: constant small increases, which train a buyer to shop on every renewal.

GEER: which currency risk to keep, which to price, which to hand back

Four dials carry this exposure: tenor, indexation, currency of account, hedge. Turn the reversible ones first.

1. Put an expiry on every quote. “Valid 7 days.” Free, reversible, and it removes most of the option before it is ever written. Do it in the template today.
2. Print the reference rate under the price. Name the rate, the source and the date it was taken. Costs nothing and makes every later conversation a fact rather than an argument.
3. Add a band. The price holds while the reference rate stays within a stated range. Outside it, you requote. This is the cheapest indexation there is, and buyers accept it far more readily than a floating price.
4. Split currency of account from currency of payment. Price in dollars, accept local currency at the published rate on the invoice date. The customer still pays in the money they hold. You stop carrying the gap.
5. Index the long contracts. Named publisher, named rate, fixed reset dates, a cap if that is what closes the deal. A quarterly reset with a 5 percent collar is a negotiation. An open-ended float is a fight.
6. Buy the hedge for what you cannot index, and charge for it as a visible line. Now the certainty is a product with a margin instead of a silent subsidy.

No-lever flag. If your buyers legally cannot pay a variable price, because the tariff is gazetted, the framework contract is signed at a fixed rate, or the purchase order is already issued, indexation is not available to you. That is a financing problem wearing a pricing costume. Shorten every new commitment and price the hedge into the next bid, or decline the tenor.

RADAR: fix the next quote before you try to fix the last contract

DO NOW, by T+3. Reversible, and correct in every scenario.

1. Add a 7-day validity line and a stated reference rate to the quote template.
2. Compute one number: the share of your cost of goods that is dollar-linked, including imported inputs, cloud, hardware, licences and any dollar-denominated debt service. Write it at the top of the model.
3. List every live commitment longer than 90 days, with its remaining tenor and its dollar-linked cost share beside it. That list is your written option book.

HEDGE, by T+14. Cheap insurance against a step you cannot forecast.

1. Put a band clause in every new contract. Do not touch the existing book yet.
2. Get indicative one-year forward pricing on your single largest exposure from two banks and one specialist provider, even if you do not trade it. The quote is the market’s number for what you have been giving away.
3. Move one input to a local-currency supplier or a local-currency contract. One is enough to learn what it costs.

DEFER AND TRIGGER. Do not reprice the whole book at once. That is the irreversible move.

1. Trigger to reprice: the reference rate breaks your band, or gross margin on the dollar-linked line falls below the floor you set this week. Then reprice that segment, on the rule, in writing.
2. Counter-trigger, by T+28: if no counterparty will quote you a forward at your size, you are uninsurable at this stage. Tenor is then the only dial you own. Cap every new commitment at 90 days and stop selling annual pricing.

From the other side of the table. DO NOW: ask which exchange rate the margin in the model assumes, and on what date it was set. HEDGE: require two lines in the monthly pack, dollar-linked share of cost of goods and weighted average remaining contract tenor. Together they price the option book without a single new spreadsheet. DEFER: re-underwriting the company until you have two quarters of gross margin at the new rate. One quarter is a step, not a trend.

CHAIN: what history does to a company carrying this

The right comparison set is defined by contract shape. Any seller holding a long fixed commitment against an input priced by someone else belongs in it: a contractor bidding fixed-price against steel, a power producer on a fixed tariff with dollar debt service, a distributor on a signed purchase order when the landed cost moves. Sector is irrelevant, the mechanism is identical.

The base rate across that class is stable. The seller absorbs the first move, tries to absorb the second, then renegotiates from weakness or exits. Absorption is almost never a decision. It is what happens while the decision is postponed.

Second order, survivors shorten tenor and the category norm shifts to indexed pricing. Third order, the firms that indexed early take share, because they can quote twelve months without loading a fear premium into the number, and their price beats the competitor who is pricing in panic.

Two present-state modifiers push the same way. Two central banks in the region rewrote how their rate is set, by directive, inside eighteen months.^{4, 5} The market for currency protection repriced alongside them, with options turnover more than doubling in three years.¹

Run the control before you blame the currency for everything. Ghana strengthened 21 percent against the dollar and plenty of Ghanaian businesses still lost margin that year.⁷ If your economics deteriorated while your currency appreciated, the diagnosis is your price, your mix or your cost to serve. FX is the loudest variable in the room and not always the one that moved.

Matrix-break flag. Instant cross-border settlement and dollar-stable balances are moving the currency-of-account decision down to the checkout. When a customer can settle in a dollar-linked balance at the moment of purchase, the option you have been writing simply stops existing for that segment, and a local-currency fixed price becomes something you chose rather than something you inherited. Short run, index your contracts. Medium run, expect the payment layer to price the currency, and design your billing so you can switch which side carries it.

Where this ensemble goes dark

Four things it cannot price.

Collection. An indexation clause your customer will not honour is prose. These models value contracts. They say nothing about whether you can enforce one against your largest account without losing it.

Your competitor’s balance sheet. A rival funded in dollars, or standing behind a parent guarantee, can absorb a move for two years and hold the fixed price while you cannot. Correct pricing loses to deeper pockets more often than founders admit.

Political reach. The same authority that reset the rate can cap what you are allowed to charge, or which currency you may invoice in. Indexation assumes the freedom to index.

The correlation underneath. Your customers usually earn in the currency you sell in. The move that lifts your cost also cuts their capacity to pay, so the pass-through you modelled and the pass-through you collect are different numbers, and only the second one banks.

None of that changes what you do this week. Put a 7-day expiry and a stated reference rate on every quote you send. Write down the dollar-linked share of your cost of goods. By T+14, get one indicative forward quote on your largest exposure. You may never trade it. You will have finally seen the price of the thing you have been giving away, and a number in the model beats a hole in it.

Sources and notes

1. Bank for International Settlements, “OTC foreign exchange turnover in April 2025,” 2025 Triennial Central Bank Survey statistical release. Trading in OTC FX markets reached $9.6 trillion per day in April 2025 on a net-net basis, up 28 percent from $7.5 trillion three years earlier; turnover of FX options more than doubled. Statistical release.
2. Bank for International Settlements, “FX markets: turnover, structure and resilience,” BIS Quarterly Review, December 2022. The US dollar was on one side of around 90 percent of all FX trades in April 2022, a share virtually unchanged for decades; forwards are used mainly to hedge currency risk or to bet on future currency movements. Article.
3. Gopinath, G., Boz, E., Casas, C., Díez, F. J., Gourinchas, P.-O., and Plagborg-Møller, M. “Dominant Currency Paradigm.” NBER Working Paper 22943, 2016. The dollar exchange rate quantitatively dominates the bilateral exchange rate in price pass-through and trade elasticity regressions; a 1 percent US dollar appreciation against all other currencies predicts a 0.6 percent decline within a year in the volume of total trade between countries in the rest of the world. Abstract and working paper.
4. National Bank of Ethiopia, Directive No. FXD/01/2024, Foreign Exchange. Banks may buy and sell foreign currencies from and to their clients and among themselves at freely negotiated rates; the directive is stated to be effective as of July 29, 2024. Directive PDF (text layer present, claims checked in the document); landing page.
5. Airtel Africa plc, Full year results for the year ended 31 March 2024. In November 2023 the Reserve Bank of Malawi adjusted the exchange rate from a selling rate of MWK 1,180 to MWK 1,700 to the US dollar with effect from 9 November 2023, and began authorising dealer banks to freely negotiate rates; the devaluation produced a $37m exceptional foreign exchange loss, plus a $169m translation loss recorded in other comprehensive income on the group’s Malawi subsidiaries for the year. Results PDF. The 44 percent figure in the text is the arithmetic on the two disclosed rates, not a company statement.
6. TCX (The Currency Exchange Fund), “Hedgeable currencies.” Country and currency table showing local-currency hedging availability, including Malawi kwacha, Ghana cedi, Kenya shilling, Ethiopia birr, Uganda shilling and Zambia kwacha; the page states TCX can offer pricing for hedging maturities up to 30 years. Currencies page.
7. Bank of Ghana, Monetary Policy Committee Press Release, September 2025. Cumulative appreciation of the cedi through 12 September 2025 of 21.0 percent against the US dollar, described as among the strongest currency performances globally year to date; the Committee lowered the Monetary Policy Rate by 350 basis points to 21.5 percent. Press release PDF; landing page.
8. UNIDROIT Principles of International Commercial Contracts 2016, Section 2 of Chapter 6. Article 6.2.1: where performance becomes more onerous for one party, that party is nevertheless bound to perform. Article 6.2.2(d): hardship requires, among other conditions, that the risk of the events was not assumed by the disadvantaged party. Article 6.2.3 sets out the right to request renegotiation. Full text PDF.
9. TCX, “Feature Story: Yellow Malawi,” Impact Report 2024. Yellow distributes solar home systems and smartphones through over 1,000 agents in Malawi; the CFO describes having had a significant amount of unhedged hard currency on the balance sheet and the decision that any new USD debt would be indexed to the local currency, quoted in full in the text. Case study PDF; publications index.
10. Nakamura, E., and Steinsson, J. “Five Facts About Prices: A Reevaluation of Menu Cost Models.” Quarterly Journal of Economics 123(4), 2008. Median frequency of non-sale price change for identical items is 9 to 12 percent per month, implying uncensored durations of regular prices of between 8 and 11 months. Author copy PDF.