Contingent Forward Contract In King
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FAQ
The primary difference between the two is around obligations. Forward commitments carry an obligation to transact, whereas contingent claims confer the right to transact, but not the obligation.
A deal contingent forward is a specialised forward foreign exchange (FX) contract. The hedging customer is only obliged to fulfil the contract if a planned major transaction, such as an acquisition, occurs.
A commitment by an entity must be fulfilled, regardless of external events, while contingencies may or may not result in liability for the respective entity.
In finance, a contingent claim is a derivative whose future payoff depends on the value of another “underlying” asset, or more generally, that is dependent on the realization of some uncertain future event. These are so named, since there is only a payoff under certain contingencies.
While a forward commitment contains an obligation to carry out the transaction as planned, a contingent claim contains the right to carry out the transaction but not the obligation. As a result, the payoff profiles between these derivatives vary, and that affects how the contracts themselves trade.
Common types of contingent claim derivatives include options and modified versions of swaps, forward contracts, and futures contracts. Any derivative instrument that isn't a contingent claim is called a forward commitment. Vanilla swaps, forward and futures are all considered forward commitments.
A contingent claim is another term for a derivative with a payout that is dependent on the realization of some uncertain future event. Common types of contingent claim derivatives include options and modified versions of swaps, forward contracts, and futures contracts.
Record a forward contract on the contract date on the balance sheet from the seller's perspective. On the liability side of the equation, you would credit the Asset Obligation for the spot rate. Then, on the asset side of the equation, you would debit the Asset Receivable for the forward rate.
Interest rate swaps are the most common type and involve the exchange of fixed interest payments for floating interest payments. Option contracts are contingent claims in which one of the counterparties determines whether and when a trade will settle.
Exporters/Importers booking a forward contract on basis of declaration : i) Turnover evidence either from audited Balance Sheet (provided it contains turnover data regarding exports/imports) or Chartered Accountant's Certificate. ii) Declaration confirming that the aggregate forward contracts booked is within limit.
