Deal contingent hedge
M&A / Merger ModelA currency or rate hedge that terminates at no cost if the underlying transaction does not complete.
Also written: deal contingent forward, deal-contingent hedging
An acquirer agreeing a price in a currency it does not hold carries that exposure from signing until the cash moves at completion. In a European cross border deal, where regulatory clearances and employee consultation sit in between, that window is regularly measured in months.
An ordinary forward locks the rate but has a defect: it survives the deal. If completion fails, the acquirer is left holding a currency position with no underlying transaction behind it, which is a speculative exposure the board never approved and which can crystallise a real loss.
A deal contingent hedge removes that tail. It is written so that it falls away without cost or penalty if the transaction does not complete, which lets an acquirer commit to a board approved price in its own currency without taking naked currency risk during a period whose length it does not control.
It is not free. The bank writing it is accepting the risk of unwinding a position with nothing to match it, and prices accordingly, so a deal contingent hedge costs more than a vanilla forward and belongs in the deal cost budget alongside financing and advisory fees. The same structure is used for interest rate risk on committed acquisition debt.
Worked example
A euro reporting acquirer agrees a sterling price and expects to complete in five months, subject to an investment screening clearance it cannot control.
An ordinary forward fixes the rate, but a refused clearance leaves the buyer holding a sterling position it has no use for. A deal contingent hedge lapses instead, at no cost.
The premium over a vanilla forward is the price of that lapse, and it is normally cheaper than the alternative of leaving the price exposed for five months.