Deal Contingent Hedging
Deal contingent hedging is utilized during the closing periods of acquisitions and investments in order to reduce the effect of FX risk whilst final due diligence is completed. In some cases, final due diligence can be completed in a few weeks.
In much larger and more complicated transactions dd can go on for many months, if not years. No matter the time frame, in a cross-border transaction, spot rates quite often change substantially. This can imperil the deal, as the mutual valuation between the buyer and seller in their own home currencies will diverge.
The New Way
Traditional use of contingent forwards and options are inconvenient and expensive. Using machine learning, we have been able to identify baskets of currencies with higher and more robust correlations to the target currency.
If deals are either completed or fall through, a basket of currencies can hold their value against the buyer's currency and seller's currency. So no matter the outcome, the risk to deal valuation remains low.
Reduce FX Volatility
Basis risk is spread over multiple currencies rather than being concentrated on one.
Using a basket of up to four currencies to hold value during the due diligence period of a cross border transaction, represents an excellent alternative to expensive vanilla option premiums.
No Derivatives Needed
Using derivatives often requires setting up and negotiating ISDAs or new credit relationships with a counter-party. Utilizing multiple spot transactions to create a basket requires neither.
Combining this with extremely low execution costs, has made it a sort after solution for contingent hedging.
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Our Cross-border Content is designed to answer questions you may have about the world of cross-border transactions. If you have further questions that aren't covered by our articles, feel free to contact our team.