FIN.13:4.5 - Distinguish an economic offset from a usable payment

Combine contributions on the same outcome and scenario before deciding how much remains exposed. An exporter receiving a foreign currency and an importer paying it can offset part of their market sensitivity. That useful observation does not establish that the importing entity can obtain the exporter’s money in time. Preserve any transfer, tax, restriction or timing condition that can defeat the proposed use; FDM.2 and FIN.2 supply the corresponding entity and dated-cash work.

Keep gross legs when a supplier, bank or settlement system still requires them. Contractual net settlement can change the required payment, but only for the covered parties, currencies, dates and obligations under an effective arrangement. A favorable derivative value can offset a business loss economically while its payment arrives after the business needs money.

Examine protection already in place before recommending more. Map each hedge to the exposure it is intended to change, including quantity and date. A single receipt cannot be assigned in full to both a supplier-payment offset and delivery under a forward. If two analyses use the same cash, reconcile the combined account. The unprotected position is obtained after applying actual available offsets, not by subtracting every contract labeled “hedge”.

Keep counterparty exposure separate from the market sensitivity being hedged. The cost of replacing a favorable unsettled trade, the principal at risk after an irrevocable payment, and the cash needed when a promised receipt is late answer different questions. Their durations and possible losses need not equal the derivative’s notional or current value. FIN.15 examines the actual settlement route; its conditions can therefore change this exposure account.