FIN.14:5.1 - Compare a fixed amount, a smaller amount and optional protection

Before committing to a hedge, consider an original constructed comparison for a customer expected to pay 100 foreign units at T. The action-changing scenarios collect either 100 or 60 at T and have a spot rate of either 0.80 or 1.00 home per foreign unit. In the 60-collection cases, the claim on the remaining 40 persists; its later recovery and value are outside these current-cash figures and must be considered separately in the whole financial choice.

Four available alternatives are left unhedged, a physical forward sale of 100 at 0.90, a physical forward sale of 60 at 0.90, and a cash-settled put on 100 at strike 0.90 costing 2 home units now. The put pays 100 × max(0.90 − S, 0) at T. The illustrative offers have no other fees or collateral, all counterparties perform, necessary physical purchases are obtainable, and time value is stipulated zero for this comparison. Actual funding capacity is tested separately.

Each forward result follows Q × S + h × (0.90 − S). For example, with collection 60 and spot 1.00, the forward for 100 requires buying 40 for 40, then delivering 100 for 90, leaving net current home cash 50. The smaller forward uses the 60 received and pays 54. The put expires without payoff, so selling the 60 at spot and subtracting its earlier premium gives total cash contribution 58.

Suppose the stated objective is a net cash contribution of at least 55 across these four cases, after the protection premium. Only the put meets that objective among the four alternatives. That is a conditional selection, not universal superiority: its premium of 2 must be payable now, and the forward purchase may require interim funding. If only 1 is available for the premium and no further money is obtainable, the put is not feasible. The comparison then returns the need to change the objective, obtain a different attainable arrangement or change the underlying exposure.

With zero collection and spot 1.00, the put pays nothing and the total contribution is −2. The four-case selection therefore does not protect against complete nonpayment. A guarantee or collection response has a different covered event and must be assessed on its actual terms. A cash-settled option also does not automatically reduce its notional when collection falls: the proposed 100 remains a separate position. If it is no longer appropriate, reconsider it with the outstanding claim and available modification terms.

This comparison occurs before commitment. In the existing partial-receipt case above, the corporation already owes delivery under its forward; it cannot retrospectively choose the better column.