30 years: Derivatives & risk management
In this video, Selim Toker talks about the hedging of market risks in an event-driven transaction, such as a piece of cross-border M&A. He uses the foreign exchange risk in the acquisition consideration as an example, but there are many other risks that could be hedged with products we are going to look at.
In this video, Selim Toker talks about the hedging of market risks in an event-driven transaction, such as a piece of cross-border M&A. He uses the foreign exchange risk in the acquisition consideration as an example, but there are many other risks that could be hedged with products we are going to look at.
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11 mins 45 secs
In event-driven transactions, such as an M&A, market risks can impact the transaction, due to the time taken between agreement and completion. This video examines the instruments that are available to hedge these risks and the pros and cons of each instrument. We will also delve more deeply into deal contingent hedging transactions and the factors that govern their pricing.
Key learning objectives:
Understand how market risks impact event-driven transactions and the need for hedging these risks
Comprehend the key factors governing the pricing of Deal Contingent Transactions
Identify the available hedging instruments and their are the pros and cons
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Transactions such as M&A, or project finance, that are agreed at a point in time, but only complete after some time when certain conditions are met. In corporate M&A, then conditions will be in a Conditions Precedent Clause inside the signed Share Purchase Agreement (SPA).
In a cross-border M&A for instance, the purchase price is usually in a different currency than the buyer’s books and if a price is agreed at signing in the foreign currency, then any strengthening of that foreign currency versus the balance sheet currency of the buyer will result in a more expensive transaction in domestic currency terms. FX can move significantly over the 6-12 month period that it typically takes to close an M&A. In 2020 Euro appreciated 8% versus sterling, and of course emerging market currencies can move multiples of this
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