Corporate Hedging Decisions and Policy

Introduction

International firms routinely contract to pay or receive foreign currency. Exchange-rate movements between the transaction date and settlement date can change cash flows, margins, liquidity and reported earnings. Corporate hedging is the deliberate reduction or reshaping of this uncertainty through operating arrangements, financing choices and derivative instruments.

Hedging does not guarantee the best possible outcome after exchange rates are known. It exchanges some favorable upside, fees or financing capacity for greater certainty. A sound decision therefore compares alternatives using effective exchange rates, total economic cost, risk reduction, liquidity effects and opportunity outcomes—not merely the quoted forward rate.

This chapter concentrates primarily on transaction exposure. Translation and long-term economic exposure may also influence policy, but they often require different measurement horizons and instruments.

Learning Objectives

After studying this chapter, students should be able to:

1. distinguish natural hedging, netting, matching, leading and lagging;
2. construct correct money-market hedges for foreign-currency payables and receivables;
3. compare forwards, futures, options, swaps and operational alternatives;
4. calculate effective rates and total economic costs;
5. evaluate risk reduction and opportunity outcomes under alternative exchange-rate scenarios;
6. formulate hedge ratios, coverage limits and governance controls; and
7. recommend a defensible corporate hedging policy.

1. The Corporate Hedging Decision

A foreign-currency exposure exists when a change in an exchange rate alters the home-currency value of an asset, liability or expected cash flow. Common exposures include:

• Contracted transaction exposure: confirmed invoices, debt service and committed purchases.
• Highly probable forecast exposure: expected sales, purchases or capital expenditure not yet contractually fixed.
• Economic exposure: long-term effects on prices, demand, costs and competitive position.
• Translation exposure: accounting effects from translating foreign subsidiaries’ statements.

Hedging can create value when exchange-rate volatility produces costly financial distress, disrupts investment plans, increases external financing needs or causes tax and information asymmetries. Nevertheless, shareholders can sometimes diversify currency risk themselves. Corporate hedging is most defensible when it protects operating capacity and cash-flow objectives rather than attempting to predict markets.

A useful policy question is not “Will the currency rise or fall?” but “How much uncertainty can the firm bear while still meeting its strategic, liquidity and covenant obligations?”

2. Measuring Net Exposure Before Hedging

Hedging gross invoices separately can create unnecessary transactions. Treasury should first map each cash flow by:

• currency;
• amount;
• direction—receipt or payment;
• contractual certainty;
• value date;
• legal entity; and
• permitted offset arrangements.

For currency j and maturity bucket T, net exposure may be written as:

where R_j,T is foreign-currency receipts and P_j,T is foreign-currency payments in the same currency and maturity bucket. A positive value is a net receivable; a negative value is a net payable.

Offsetting is valid only when timing, currency, legal ownership and settlement arrangements are sufficiently aligned. A USD receipt next year does not automatically hedge a USD payment next week. Likewise, cash flows belonging to separate subsidiaries may not be legally transferable because of exchange controls, taxes, insolvency rules or minority interests.

3. Internal and Operational Hedging Techniques

3.1 Natural hedging

A natural hedge aligns operating cash inflows and outflows in the same currency without entering a stand-alone derivative. Examples include:

• sourcing inputs in the currency of sales;
• producing in a major sales market;
• borrowing in the currency that generates operating cash flow;
• invoicing customers in the currency of major costs; and
• holding foreign-currency cash for foreseeable payments.

Natural hedging can reduce transaction costs and counterparty exposure. However, procurement, production and financing decisions should not be distorted solely to obtain a currency offset. A supplier offering an inferior product is not economically preferable merely because its invoice currency matches export revenue.

3.2 Matching

Matching pairs identifiable receipts and payments in the same currency and approximately the same period. Suppose a company expects a EUR 900,000 receipt and a EUR 650,000 payment in 60 days. It can match EUR 650,000 and hedge only the residual EUR 250,000 receivable.

Matching differs from broad natural hedging because it usually refers to the deliberate pairing of specific monetary cash flows rather than structural operating choices.

3.3 Bilateral and multilateral netting

Bilateral netting offsets reciprocal obligations between two group companies. Multilateral netting uses a central treasury or netting center to combine obligations among several entities and settle only net balances.

Benefits include fewer payments, lower spreads and bank fees, reduced operational risk and improved visibility. Limitations include local exchange controls, withholding taxes, transfer-pricing rules, documentation requirements and the concentration of liquidity at the treasury center.

3.4 Leading and lagging

Leading means accelerating a payment or collection. Lagging means delaying it. A firm expecting a foreign currency to appreciate may lead a payable to avoid buying the currency later at a potentially higher price. It may lag a receivable when appreciation is expected, subject to credit and liquidity risk.

The decision should be based on total financing cost rather than a forecast alone. If a supplier grants a discount d for immediate payment of a foreign amount X_F, the immediate home-currency cost, ignoring transaction fees, is:

Here S₀ is the spot rate in units of home currency per unit of foreign currency. This amount should be compared at a common valuation date with the present value of paying later, including financing, lost deposit interest, discounts forfeited, penalties and the cost of any hedge.

Leading and lagging may damage supplier relationships or violate arm’s-length terms when used aggressively within a corporate group. Internal transfers must comply with tax, capital-control and governance requirements.

4. Money-Market Hedges

A money-market hedge synthesizes a forward-like exchange rate by combining borrowing, spot conversion and investment. The construction differs fundamentally for payables and receivables.

The following formulas assume:

• S₀ is quoted as home currency per unit of foreign currency;
• rates are annual simple interest rates for a horizon of T years;
• borrowing and deposit rates may differ;
• the foreign cash flow is certain and occurs at maturity; and
• taxes, fees and bid–ask spreads are initially excluded.

Actual transaction-specific quotes should replace generic rates.

4.1 Foreign-currency payable

For a payable of X_F foreign-currency units at maturity:

1. determine the foreign currency that must be deposited today;
2. buy that amount of foreign currency at spot;
3. finance the purchase by borrowing home currency; and
4. use the matured foreign deposit to pay the supplier.

The foreign deposit required today is:

The home currency borrowed today is S₀D_F. Its repayment at maturity is:

where:

• r_F,d = foreign-currency deposit rate;
• r_H,b = home-currency borrowing rate; and
• C_H = locked home-currency maturity cost.

The effective home-currency cost per unit of foreign currency is:

The payable hedge correctly uses the foreign deposit rate and the home borrowing rate.

#### Worked example: payable hedge

A Canadian company must pay USD 1,000,000 in 90 days. Assume:

• spot rate = CAD 1.3500/USD;
• USD deposit rate = 4.00% per year;
• CAD borrowing rate = 6.00% per year;
• T = 0.25 year; and
• simple interest with no fees.

First, deposit enough USD today to accumulate to USD 1,000,000:

Buy this amount using borrowed Canadian dollars:

The CAD loan repayment after 90 days is:

The USD deposit grows to exactly USD 1,000,000 and pays the supplier. The effective rate is:

There is no second USD obligation: the firm owes CAD to its lender, while the matured USD deposit settles the supplier invoice.

4.2 Foreign-currency receivable

For a receivable of X_F foreign-currency units at maturity:

1. borrow the present value of the foreign-currency receivable;
2. convert the borrowed foreign currency into home currency at spot;
3. invest the home currency; and
4. use the eventual foreign-currency receipt to repay the foreign loan.

The foreign amount borrowed today is:

The resulting home-currency maturity proceeds are:

where r_F,b is the foreign borrowing rate and r_H,d is the home deposit rate. The effective receipt rate is:

The receivable hedge correctly uses the foreign borrowing rate and the home deposit rate.

#### Worked example: receivable hedge

A UK company will receive EUR 800,000 in six months. Assume:

• spot rate = GBP 0.8600/EUR;
• EUR borrowing rate = 5.00% per year;
• GBP deposit rate = 3.00% per year;
• T = 0.5 year; and
• simple interest with no fees.

Borrow the present value of EUR 800,000:

Convert it into pounds:

Invest the pounds for six months:

The EUR 800,000 customer receipt repays the euro loan at maturity. The effective receipt rate is:

4.3 Practical limitations

Money-market hedges use credit lines and can affect leverage, covenants and reported balance sheets. Quoted borrowing and deposit rates may also apply to different credit qualities or amounts. Transaction costs, withholding taxes, early repayment terms and day-count conventions must be included. For compound interest, each simple-interest factor must be replaced by the applicable compounding factor, such as (1+r/m)^mT.

5. Derivative Hedging Strategies

5.1 Forward contracts

A forward contract fixes today the exchange rate for a future purchase or sale of currency. It is customizable by amount and maturity but creates counterparty credit exposure and an obligation to transact even if the underlying commercial cash flow disappears.

For a payable hedged at forward rate F₀:

For a receivable, the same expression gives home-currency proceeds. Fees and settlement costs must be added for payables or deducted for receivables when calculating effective rates.

5.2 Currency futures

Futures are standardized, exchange-traded contracts settled through daily margining. They reduce bilateral counterparty risk but introduce basis risk because contract sizes and maturity dates may not match the exposure exactly. Daily variation margin also creates liquidity demands.

5.3 Currency options

A currency option gives the buyer a right, but not an obligation, to exchange currencies at a strike rate. A firm with a foreign payable can buy a call on the foreign currency; a firm with a foreign receivable can buy a put.

Options establish a worst-case rate while retaining favorable currency movements. Their cost is the premium and its financing cost. For a foreign-currency payable protected by a call with strike K, maturity spot rate S_T and home-currency future value of premium [[MATH{:PV_T}]], the maturity-equivalent total cost is:

This expression assumes physical exercise or an economically equivalent cash settlement and ignores additional fees. Here the firm buys at spot if S_T < K and exercises if S_T > K.

#### Option opportunity example

A US company owes EUR 2,000,000 in three months. It buys a EUR call with strike USD 1.10/EUR. The premium is USD 0.02 per euro, paid now, and the three-month financing factor is 1.01. The maturity-equivalent premium is USD 40,400.

• If S_T = 1.16, the option is exercised. Total cost is 2,000,000 × 1.10 + 40,400 = USD 2,240,400, an effective rate of USD 1.1202/EUR.
• If S_T = 1.04, the option expires. Total cost is 2,000,000 × 1.04 + 40,400 = USD 2,120,400, an effective rate of USD 1.0602/EUR.

The option provides protection but remains more costly than remaining unhedged when the premium exceeds the benefit obtained.

5.4 Swaps and layered structures

A currency swap exchanges principal and interest payments in different currencies and is useful for recurring or long-term exposures. Options may also be combined into collars that set both a floor and ceiling rate. Such structures can reduce upfront premium but sacrifice favorable outcomes and may create contingent obligations. “Zero-premium” does not mean zero economic cost.

6. Comparing Hedging Alternatives

6.1 Effective rates

The effective payable rate is:

The effective receivable rate is:

Lower rates are preferable for payables; higher rates are preferable for receivables. All amounts must be evaluated at the same date and on consistent assumptions.

6.2 Total economic cost

A professional comparison includes:

• quoted rate or premium;
• bid–ask spread and bank fees;
• borrowing or deposit interest;
• collateral and margin funding;
• tax consequences;
• credit-line usage;
• accounting volatility;
• administrative cost;
• counterparty credit risk; and
• the cost of over-hedging if forecast transactions fail to occur.

6.3 Risk reduction

Risk reduction can be measured through changes in cash-flow variance, earnings-at-risk, cash-flow-at-risk or adverse scenario losses. A hedge that is cheapest under the expected spot rate may be unacceptable if it leaves severe tail risk.

6.4 Opportunity outcomes

A forward eliminates both unfavorable and favorable exchange-rate outcomes. An option limits downside while preserving upside, but charges a premium. The opportunity cost of a fixed hedge is visible only after the maturity spot rate becomes known; it does not prove that the original hedge decision was irrational.

7. Hedge Ratios and Policy Limits

7.1 Simple coverage ratio

For an exposure amount [[MATH{�:E}]] and hedged amount H, the coverage ratio is:

A ratio of 0.80 means that 80% of the measured exposure is hedged. Ratios above 1.00 generally represent over-hedging unless explicitly justified by related exposures.

7.2 Minimum-variance hedge ratio

When the hedge instrument does not move perfectly with the exposure, the variance-minimizing number of hedge units can be derived. Let [[MATH{�:∆X}]] be the change in home-currency value of the unhedged exposure and [[MATH{�:∆G}]] the payoff change from one long unit of the hedge instrument. If the hedged change is [[MATH{�:∆X+n∆G}]], then:

The sign identifies whether a long or short hedge position is needed. This result assumes that variance is the risk criterion and that historical covariance is relevant to the hedge horizon. It does not account directly for transaction costs, nonlinear option payoffs or tail-risk preferences.

For futures, a commonly used magnitude is:

where [[MATH{�:ρ_{SF} }]] is the correlation between changes in the spot exposure price and futures price, and σ_S and σ_F are their standard deviations measured over consistent intervals. The number of contracts is approximately:

where Q_A is the exposure quantity and Q_F is the quantity per futures contract. Contract direction depends on whether the firm is hedging a payable or receivable.

7.3 Policy limits

A corporate policy may specify:

• minimum and maximum hedge percentages by exposure class;
• time-horizon bands, such as 0–3, 4–12 and 13–24 months;
• higher coverage for contracted than forecast exposures;
• approved instruments and currencies;
• option-premium budgets;
• counterparty and credit limits;
• maximum tenor and mark-to-market loss;
• collateral and liquidity limits;
• delegated dealing authorities; and
• prohibited speculative positions.

For example, a board might require 70–100% coverage of contracted exposures within six months, 30–70% of highly probable forecasts within twelve months, and prohibit hedging uncertain forecasts beyond two years without treasury-committee approval.

Figure: A disciplined hedging process begins with exposure identification and netting before instrument selection.

8. Applied Case: Orion Mobility Group

Background

Orion Mobility Group is an illustrative Canadian manufacturer. In 90 days it expects:

• USD 2.4 million payable and USD 0.9 million receivable;
• EUR 3.0 million receivable and EUR 0.8 million payable.

Its policy requires 80% hedging of contracted net exposures. All rates below use simple interest and exclude taxes and fees.

Problem and exposure analysis

Matching produces:

• net USD payable: USD 1.5 million;
• net EUR receivable: EUR 2.2 million.

Accordingly, the policy hedge amounts are USD 1.2 million and EUR 1.76 million. The remaining 20% is intentionally unhedged within policy limits.

USD payable analysis

Available quotes are:

• spot: CAD 1.3500/USD;
• 90-day forward: CAD 1.3600/USD;
• USD deposit rate: 4%; and
• CAD borrowing rate: 6%.

The money-market effective rate is:

For USD 1.2 million, the money-market maturity cost is CAD 1,628,019.80. The forward would cost CAD 1,632,000. The money-market hedge is cheaper by CAD 3,980.20 before fees and balance-sheet effects. Orion selects it, provided sufficient borrowing capacity exists.

EUR receivable analysis

Available quotes are:

• spot: CAD 1.4600/EUR;
• 90-day forward: CAD 1.4700/EUR;
• EUR borrowing rate: 5%; and
• CAD deposit rate: 3%.

The money-market receipt rate is:

Money-market proceeds on EUR 1.76 million would be CAD 2,556,910.62. A forward sale at CAD 1.4700/EUR yields CAD 2,587,200. Orion therefore selects the forward, assuming comparable counterparty and accounting treatment.

Scenario outcomes

Suppose the maturity spot rates are CAD 1.4200/USD and CAD 1.3800/EUR.

• USD total cost = CAD 1,628,019.80 for the hedged portion plus USD 300,000 × 1.4200 = CAD 426,000, totaling CAD 2,054,019.80. Remaining completely unhedged would have cost CAD 2,130,000.
• EUR total proceeds = CAD 2,587,200 from the forward plus EUR 440,000 × 1.3800 = CAD 607,200, totaling CAD 3,194,400. Remaining completely unhedged would have produced CAD 3,036,000.

The hedges protect CAD 234,380.20 across the two exposures in this adverse scenario.

If instead USD falls to CAD 1.2800 and EUR rises to CAD 1.5800, the policy creates opportunity outcomes. The USD strategy costs CAD 92,019.80 more than remaining unhedged, while the EUR strategy produces CAD 193,600 less than remaining unhedged. These differences are foregone favorable outcomes, not implementation losses relative to the policy’s risk-reduction objective.

Learning points

1. Match and net before using external instruments.
2. Use the correct borrowing and deposit rates for money-market hedges.
3. Compare payable alternatives by lower effective cost and receivable alternatives by higher effective proceeds.
4. Incorporate financing capacity and counterparty limits before execution.
5. Judge policy performance against risk objectives, not hindsight alone.

9. Governance, Accounting and Ethical Considerations

A sound treasury control system separates authorization, dealing, confirmation, settlement, valuation and accounting. Independent confirmations and reconciliations reduce fraud and error. Dealers should not be rewarded solely for favorable trading outcomes, because this can encourage speculation disguised as hedging.

Under frameworks such as IFRS 9 or ASC 815, derivatives are generally measured at fair value. Hedge accounting may align the timing of derivative gains and losses with the hedged item, but it requires eligibility, designation and documentation. Economic hedging and accounting qualification are not identical.

Ethical policy requires transparent reporting of leverage, optionality, collateral calls and forecast uncertainty. Complex products should not be presented to directors as “costless” when they surrender upside or contain contingent liabilities.

10. Technology and Contemporary Practice

Treasury management systems can aggregate exposures, obtain market quotes, monitor limits and automate accounting entries. Application programming interfaces increasingly connect enterprise systems, banks and trading platforms. Machine learning can improve cash-flow forecasts or detect anomalous transactions, but it cannot eliminate model risk. Historical relationships may fail during crises, geopolitical events or regime changes.

Contemporary best practice combines automation with human approval, independent model validation, cybersecurity controls and auditable data lineage. Firms are also paying greater attention to collateral liquidity, counterparty concentration and sudden disruptions to otherwise reliable natural hedges.

Chapter Summary

Corporate hedging begins with accurate identification, matching and legal netting of currency cash flows. Natural hedging, matching, leading and lagging may reduce exposure without derivatives, but they have operating, financing and governance consequences.

A payable money-market hedge requires borrowing home currency, purchasing and depositing foreign currency, and using the matured deposit to pay the supplier. A receivable hedge requires borrowing foreign currency, converting it into home currency, investing the home currency and repaying the foreign loan with the receipt. Forwards provide certainty, options retain favorable outcomes at a premium, futures introduce standardization and basis risk, and swaps address longer-term cash-flow streams.

Alternatives should be compared using consistent valuation dates, effective rates, total economic costs, liquidity effects, risk reduction and opportunity outcomes. Hedge ratios define coverage, while policy limits establish authorized instruments, maturities, counterparties and control responsibilities. Effective governance ensures that hedging supports operating resilience rather than speculative trading.

Key Terms

Basis risk: Risk that the hedge instrument and underlying exposure do not change by equal amounts.

Cash-flow-at-risk: A statistical estimate of potential adverse cash-flow change over a specified horizon and confidence level.

Currency option: A contract granting the right, but not the obligation, to exchange currencies at a specified rate.

Economic exposure: Long-term sensitivity of enterprise value and competitiveness to exchange-rate changes.

Effective rate: Total maturity-equivalent home-currency cost or proceeds per unit of foreign currency.

Forward contract: A customized obligation to exchange currencies at a future date at a rate fixed today.

Hedge ratio: Proportion of a measured exposure covered by hedging positions.

Leading: Accelerating a payment or receipt relative to its normal date.

Lagging: Delaying a payment or receipt relative to its normal date.

Matching: Pairing foreign-currency inflows and outflows by currency and timing.

Money-market hedge: A synthetic forward created through borrowing, spot conversion and investment.

Multilateral netting: Centralized offsetting of obligations among multiple group entities.

Natural hedge: Reduction of currency risk through aligned operating or financing cash flows.

Net exposure: Foreign-currency receipts minus payments for a specified currency and period.

Opportunity outcome: Foregone benefit from favorable exchange-rate movement because an exposure was hedged.

Over-hedging: Holding a hedge position larger than the qualifying underlying exposure.

Transaction exposure: Currency risk arising from contracted or forecast foreign-currency cash flows.

Translation exposure: Accounting sensitivity arising when foreign financial statements are translated into reporting currency.

Review Questions

Short Answer Questions

1. Distinguish natural hedging from matching.
2. Why should gross foreign-currency invoices be netted before external hedges are arranged?
3. State the transaction sequence for a payable money-market hedge.
4. What opportunity outcome is associated with a forward contract?
5. Why can a zero-premium collar still have an economic cost?

Long Answer Questions

1. Evaluate the benefits and limitations of natural hedging for a multinational manufacturer.
2. Explain and derive the payable and receivable money-market hedge formulas.
3. Compare forwards, futures, options and money-market hedges in terms of certainty, liquidity and risk.
4. Design the principal sections of a corporate foreign-exchange hedging policy.
5. Discuss the governance, ethical and accounting issues associated with corporate derivatives.

Analytical / Application Questions

1. A firm owes JPY 120 million in six months. Using independently obtained spot, deposit and borrowing quotations, construct a money-market hedge and compare it with a forward hedge.
2. A company has forecast EUR receipts with uncertain amounts. Recommend a hedge ratio and instrument mix, explaining the risks of under-hedging and over-hedging.
3. Evaluate whether a favorable unhedged outcome proves that a prior hedging decision was inappropriate. Use risk objectives and opportunity outcomes in your analysis.

Multiple Choice Questions with Answers

Question 1

Which sequence correctly constructs a money-market hedge for a foreign-currency payable?

A. Borrow home currency, buy and deposit foreign currency, then use the matured deposit to pay the supplier

B. Borrow foreign currency, sell it for home currency, and invest the home currency

C. Invest home currency and borrow additional foreign currency at maturity

D. Sell the foreign currency forward before it has been acquired

Correct Answer: A. Borrow home currency, buy and deposit foreign currency, then use the matured deposit to pay the supplier

Question 2

A UK firm will receive EUR 800,000 in six months. The spot rate is GBP 0.8600/EUR, the EUR borrowing rate is 5% per year, and the GBP deposit rate is 3% per year. Using simple interest, what are the approximate maturity proceeds from a money-market hedge?

A. GBP 671,220

B. GBP 681,288

C. GBP 688,000

D. GBP 705,200

Correct Answer: B. GBP 681,288

Question 3

Which rates are used in the standard money-market hedge formula for a foreign-currency payable?

A. Foreign borrowing rate and home deposit rate

B. Foreign deposit rate and home borrowing rate

C. Home borrowing rate and home deposit rate only

D. Foreign borrowing rate and foreign deposit rate only

Correct Answer: B. Foreign deposit rate and home borrowing rate

Question 4

A firm has EUR 900,000 receivable and EUR 650,000 payable on the same date. What is its net exposure before external hedging?

A. EUR 250,000 receivable

B. EUR 250,000 payable

C. EUR 1,550,000 receivable

D. No exposure

Correct Answer: A. EUR 250,000 receivable

Question 5

For a foreign-currency payable, which alternative is preferable when all costs are measured consistently and risk is equivalent?

A. The alternative with the highest effective rate

B. The alternative with the lowest effective rate

C. The alternative with the largest notional amount

D. The alternative with the highest deposit rate in isolation

Correct Answer: B. The alternative with the lowest effective rate

Question 6

What is the principal advantage of buying a currency option rather than entering a forward contract?

A. It always has no upfront cost

B. It eliminates all counterparty and basis risk

C. It limits adverse outcomes while retaining favorable exchange-rate outcomes

D. It guarantees a better effective rate than every other hedge

Correct Answer: C. It limits adverse outcomes while retaining favorable exchange-rate outcomes

Question 7

An exposure is EUR 5 million and the firm hedges EUR 4 million. What is the simple coverage ratio?

A. 20%

B. 40%

C. 80%

D. 125%

Correct Answer: C. 80%

Question 8

Using simple interest, a Canadian firm owes USD 1,000,000 in 90 days. Spot is CAD 1.3500/USD, the USD deposit rate is 4%, and the CAD borrowing rate is 6%. What is the approximate locked maturity cost of a money-market hedge?

A. CAD 1,336,634

B. CAD 1,350,000

C. CAD 1,356,683

D. CAD 1,370,250

Correct Answer: C. CAD 1,356,683

Question 9

Which statement about a minimum-variance hedge ratio is correct?

A. It always equals 100% regardless of correlation

B. It minimizes expected transaction fees only

C. It depends on the covariance between exposure changes and hedge payoffs

D. It guarantees that no loss can occur

Correct Answer: C. It depends on the covariance between exposure changes and hedge payoffs

Question 10

Why can hedging highly uncertain forecast transactions create additional risk?

A. The firm may retain a derivative after the forecast transaction fails to occur

B. Forecast transactions are legally identical to spot transactions

C. Derivatives cannot be valued until maturity

D. Forecast exposures must always be hedged at more than 100%

Correct Answer: A. The firm may retain a derivative after the forecast transaction fails to occur