Unwinding a Contract

Occasionally the hedging contract arrangement must be discontinued. The most common reason is the discontinuance of the hedged item—the microfinance loan for which the hedge was originally arranged is either no longer on the client’s balance sheet or has been substantially restructured. In either event, the hedging contract is no longer effective as initially designated.

When this happens, the client has two choices: 1) the client may apply the hedge to another microfinance loan with similar exposures and terms, or 2) the client must unwind the contract. The unwind of the hedge should occur within the financial reporting period in which the hedged loan was discontinued.

To unwind the contract, the client contacts MFX for indications. Prevailing market conditions will determine the fair market value of the hedging contract. MFX then responds to the MIV with the settlement value and supporting valuation documentation. With the unwind, the MIV will settle it's obligation to MFX with a settlement payment made to or received from MFX based on the fair market value of the contract.

Unwind settlements are made like other hedging settlements, with counterparties payments settled via wire transfers.