Deal Contingent Derivatives

gammaphreak01 · Post by **gammaphreak01** » Fri Apr 15, 2011 9:27 pm

I am wondering if anyone on this forum can give any colour on these. The basic premise is that:

you are doing an M&A transaction which requires for you to purchase (ideally) a forward fx exchange contract to hedge your fx risk on the deal. You purchase a deal contingent forward from a local friendly bank which basically says ïf the deal goes through, you will be obliged to purchase USD at a rate of [x]EUR per USD"

Upon reviewing this, I don't know how a bank could underwrite this risk *without* having a link between the deal occuring and some market parameters e.g. if the deal doesn't go through then the market equity price of the aggressor in the relationship will drop by 10%. Then one would hedge on a prorata basis such that on average the product providor is hedged

Does anyone else have any more colour to add to this

jungle · Post by **jungle** » Fri Apr 15, 2011 10:03 pm

Does this help?

Dimatrix · Post by **Dimatrix** » Tue Apr 19, 2011 11:08 pm

The product is hedged via a position in FX options and forwards. No position in stocks/options of any of the two companies involved in the M&A.

mj · Post by mj » Wed Apr 20, 2011 7:38 am

I have vague memories of Musiela talking about this, and BNP Paribas doing deals like this, a long time ago. Possibly there was an article in Risk magazine.

jaiman · Post by **jaiman** » Wed Aug 28, 2019 2:01 pm

Dredging this old thread up as I can't find anything else about Deal Contingent FX Forwards in the archive.

I'm specifically curious why these aren't hedged by shorting the target's stock? Is it out of fear of a higher bidder? Margins are fat enough that you don't need the hassle? FX teams at banks not being permitted to get in the equity space?

Any insight, papers etc appreciated.

ronin · Post by **ronin** » Mon Sep 02, 2019 8:09 am

It's been ages since I worked in that space.

Basicaly, long cds protection >> short stock. But either of them hedges you for the scenario of "any deal". Neither hedges you for the scenario of "this particular deal". So if you are outbid, it's a double whammy.