FIN.14:5.3 - An eventual offset can require cash first

Consider a separate cash-settled forward sale of 100 foreign units at 0.90, paired with a receipt of 100 at day 30. Assume zero discounting and an enforceable term requiring cash collateral equal to an adverse marked value. On day 15, the remaining forward price is 1.00, so the seller’s forward value is −10 and collateral 10 must be posted by day 16. Usable cash then is 6 and the required reserve is 2. Only 4 is free for this purpose, leaving a funding need of 6.

Suppose the spot rate is 0.80 on day 30, the customer pays in full, and the forward counterparty pays the resulting gain of 10 and returns all collateral 10 at that time. The operating receipt converts to 80. The hedge’s dated cash is −10 on day 16 and +20 on day 30, for net 10 before funding costs; combined net cash from receipt and hedge is 90. Counting the collateral return as an additional profit would overstate that result by 10.

The eventual protection is therefore effective under these stated performance conditions, but it was not executable without the missing interim 6. FIN.2 assesses an obtainable response and its repayment; FIN.15 performs it within authority. A different margin rule, return date or failed counterparty changes both the funding and protection comparison.