Identifier: C3T2L5 · Revision: 2026-10-26 · Classification: domestic

Decision and objectives

Budget initial margin, variation losses and a parameter shock together. The decision record must connect the exposure, cash dates and implementable contract, rather than stop at a favorable price forecast.

By the end, you can budget initial margin, variation losses and a parameter shock together; avoid spending a future underlying gain before it becomes cash; compare a financed hedge with a smaller funded alternative.

Prerequisite: C3T2L4; completed Classes 1 and 2 and the Stock Market School foundation or Forex School foundation. All cases below are hypothetical; their prices, costs, rates, dates, contractual assumptions and collateral amounts are teaching inputs, not current offers.

Mechanics

A hedge is a portfolio plus a funding arrangement. An exporter short currency futures may gain on its receivable when the currency rises, yet pay futures losses immediately. The receivable remains an asset due later, not cash in the clearing account today. Cash-reserve design therefore starts with dated obligations, not only net terminal profit.

Separate initial collateral, additional collateral from parameter changes, cumulative variation losses, execution costs and reserve financing. Credit limits must be committed, accessible in the right currency and operational before the call.

Price and return drivers

Required starting liquidity in the supplied deterministic stress = initial margin + peak cumulative adverse variation + incremental margin shock + paid costs. The sum is a budget for this stress path, not a probability-based maximum loss. Collateral can be released later, but is unavailable while pledged.

Worked case

A hypothetical exporter shorts USD 100,000 equivalent at TRY 40/USD; all contract units are assumed matched. Initial cash margin TRY 500,000. Stress futures marks 42 then 44 imply cumulative losses TRY 200,000 then TRY 400,000. Required margin rises to TRY 650,000, adding TRY 150,000. Paid execution charges TRY 5,000 give peak planned liquidity 500,000 + 400,000 + 150,000 + 5,000 = TRY 1,055,000. Financing that full reserve for 30 days at 36% actual/360 costs TRY 31,650; include it in the economic comparison, paid externally here.

Adverse case

Only TRY 900,000 accessible liquidity leaves TRY 155,000 unfunded before reserve financing. The USD receivable is worth TRY 400,000 more at 44 than at 40, but arrives in 60 days and cannot cover today's cash debit. If the receivable is also delayed or disputed, credit risk joins the hedge mismatch. A smaller 80% hedge with proportional teaching margin and charges needs TRY 844,000 under the same path and leaves USD 20,000 exposed; actual portfolio margin need not scale exactly.

Practical use

Obtain a margin stress from the member and a dated bank-transfer and credit-line plan. Identify who can authorize top-ups during holidays or absences. Use a separate cash reserve rather than a broad label such as liquid investments whose sale proceeds may arrive too late. Compare the full funding expense with a forward, option or unhedged baseline without assuming those alternatives have identical access or credit terms.

Reconcile the confirmation, position register and cash statement separately. Costs include the quoted bid/ask spread, brokerage and clearing charges, collateral or principal financing, currency conversion, custody where relevant, and exit or termination charges. A mark is not a fill. Any amount explicitly excluded below remains outside the reported result. Tax is excluded from these teaching cases: an actual comparison requires income year, investor residence and individual/corporate status, contract and acquisition dates, settlement form and effective law. The GIB guide, checked 2026-10-26, covers 2025 individual investment income, so its publication date alone does not settle a 2026 derivative liability.

Decision boundaries

The 80% hedge can be defensible if residual currency risk fits the mandate and all accessible cash still covers its stress. It cannot be called fully hedged. Decline the 100% futures hedge if the missing funding has no credible source, even if its terminal payoff perfectly offsets the invoice.

Practice and references

Exercise: hypothetical initial margin TRY 120,000, peak variation debit TRY 80,000, margin shock TRY 30,000 and costs TRY 2,000. Solution: liquidity budget TRY 232,000. Available TRY 210,000 leaves TRY 22,000 short; a paper gain on an unsold asset is not a transfer. Funding TRY 232,000 at 30% for 20/360 costs TRY 3,866.67 separately.

Takeaway: Compare a financed hedge with a smaller funded alternative using the actual cash schedule, with every excluded cost and remaining exposure stated.

Reference card: viop-future. Formula: Deterministic hedge liquidity budget. Glossary: Funding risk, Residual risk. Next lesson: C3T3L1. Topic test.

Sources and verification date (2026-10-26):

Shared reference guide | Class examination