Research Risk and Trading Plans · Forwards Trading Guide
A useful stress test asks whether the organisation can survive the cash path, not only the final gain or loss. Market moves and delayed receipts can occur together.
Define several plausible disruptions
Consider exchange rate or commodity price shocks, interest curve changes, wider dealer spreads, counterparty failure and delayed commercial payments. Include combinations rather than only isolated changes. A currency move may coincide with a customer delaying payment and a credit provider reducing available funding. The joint effect can be more important than any individual assumption.
Map the dated cash requirement
Suppose a business has $80,000 of unrestricted liquidity. A scenario requires $50,000 of additional collateral and $40,000 of other payments before a delayed receipt arrives. The immediate shortfall is $10,000. A future favourable commercial outcome does not fill that gap today. Only count committed funding that is actually available under the scenario and in the required currency.
Separate value from funding
A valuation loss, collateral payment and eventual settlement can represent different stages of the same exposure. Do not add them as three independent losses. Build a timeline that reconciles the derivative mark, collateral already held, payment obligations and commercial receipts. Include funding interest and costs separately, and avoid treating restricted collateral as freely available operating cash.
Define actions before the stress
Assign responsibility for escalation, additional liquidity and changes to exposure. Check how quickly positions could be reduced and whether a dealer is obliged to quote. Set triggers based on liquidity and concentration as well as market value. A stress scenario is not a forecast or a guaranteed worst case, so keep a buffer for events beyond the selected examples.
Try it yourself
A scenario needs $120,000 before receipts arrive. Available unrestricted cash is $70,000 and a confirmed usable credit line is $30,000. What funding gap remains?
Show the worked answer
$20,000. An uncommitted facility or collateral that cannot be withdrawn should not be counted as available funding to close that gap.
Further reading
- ISDA: Collateral operational practices
- BIS: FX swaps forwards and funding obligations
- BIS: Managing FX settlement risks
Educational material. Numerical examples are hypothetical and exclude costs unless stated. Forward contracts create binding obligations and may require collateral or credit approval. Actual terms, access and risks depend on the agreement and jurisdiction.
