M&A: The Deal-Contingent Due Diligence Process

The Deal-contingent Hedge offers an efficient way to mitigate FX risk associated with the time between the signing and closing of a cross-border M&A transaction. These solutions allow a company to hedge the market risk associated with a planned acquisition in such a way that if the deal fails to complete, the hedge falls away at no cost to them.

Deal-contingent hedging works by linking the settlement of the hedging instrument (be it a forward, option, or collar-type solution) to the success or failure of the underlying transaction, typically a merger or acquisition. If the transaction completes, the hedge is settled as it would normally do on the completion date. However, if the transaction fails, the hedge disappears at no cost to the company. While deal-contingent features can be added to any hedging product, the deal-contingent forward is by far the most common solution traded.

This paper assumes a degree of familiarity with the deal-contingent concept and delves deeper into the due diligence process that a financial institution would need to perform in order to gain comfort in offering the product. It is structured around the following five themes and is shared to increase awareness of the process.

Deal-contingent due diligence process.pdf

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