Market dislocation risk drives deal-contingent hedge demand
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Market dislocation risk drives deal-contingent hedge demand

The recent resurgence in M&A activity has driven interest in deal-contingent hedging as firms look for a buffer against unfavourable FX or interest-rate movements.

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Deal-contingent hedging (linking the settlement of a vanilla hedging instrument to the success or failure of the underlying transaction) has evolved from an efficient way of mitigating foreign-exchange risk between the signing and closing of a cross-border M&A transaction into an option for hedging interest-rate, inflation and even commodities risk.

Transactions where a market dislocation could endanger the liquidity of the company or negatively affect the economics of the underlying transaction are simply too risky to be left unhedged.

For highly leveraged project-finance deals, even a relatively minor increase in interest rates during the period prior to financial close could have a wide impact on both the debt quantum required and the eventual equity return.

Daniel Jack, Monex Europe

The appeal of the deal-contingent hedge is that if the deal fails to complete, the hedge falls away at no cost to either party.

“Deal-contingent hedging is typically used in complex deals where there are other factors such as regulatory approval and multiple lenders, as well as financing risk relating to changes in interest rates,” says Daniel Jack, head of institutional at Monex Europe.


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