Contingent Forward Contract In Riverside
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FAQ
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.
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.
A Forward FX contract is considered a financial derivative. Under IFRS 9, a derivative must be initially measured at fair value and subsequent value changes are recognized. Unless you are applying hedge accounting then movements must be posted to the profit or loss account.
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.
A contingent claim is a derivative instrument that provides its owner a right but not an obligation to a payoff determined by an underlying asset, rate, or other derivative. Contingent claims include options, the valuation of which is the objective of this reading.
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.
