Identifier: C3T6L4 · Revision: 2026-10-26 · Classification: restricted

Decision and objectives

Estimate replacement value from a supplied forward curve. 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 estimate replacement value from a supplied forward curve; compare a dealer closeout with a model mid and credit exposure; stress collateral and early invoice cancellation.

Prerequisite: C3T6L3; 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 bilateral forward can gain value to one party and create credit exposure to the other. A positive model value is an unsecured claim unless collateral or other protection applies. A credit line permits exposure within terms but is not insurance against provider failure. Early termination requires the governing agreement or a negotiated closeout; the original rate is not a free cancellation option.

Price and return drivers

For a long base-currency forward, a simplified quote-currency value = base amount × (current same-date forward − original contracted forward) × supplied discount factor. This is a mark under the stated model. A dealer executable closeout can be worse because of bid/ask, credit, funding and termination fees. A negative value can require cash immediately on termination.

Worked case

Hypothetical long USD 100,000 at 42 TRY/USD; same maturity current forward 44; remaining discount factor 0.96. Mid model value = 100,000 × 2 × 0.96 = TRY 192,000. A supplied closeout bid pays TRY 185,000; fee TRY 2,000 leaves TRY 183,000. Difference from mid is TRY 9,000 including the fee. If the underlying invoice is cancelled, closing the now unnecessary hedge removes future currency exposure while realizing that amount; keeping it is a new speculative decision.

Adverse case

At current forwards 38, 42 and 44 with the same supplied discount factor, model values are −TRY 384,000, zero and +TRY 192,000. These are pre-maturity values, distinct from final spot-linked settlement. A hypothetical collateral agreement with TRY 50,000 threshold would require TRY 334,000 posting at the negative model value, ignoring minimum transfer amounts solely for illustration. A TRY 200,000 available reserve leaves TRY 134,000 gap; future invoice savings cannot fill today's call automatically.

Practical use

Read master agreement, confirmations, closeout netting, collateral currency/haircuts, thresholds, minimum transfer amounts, dispute procedure and termination quotation method. Confirm legal enforceability and current domestic access rather than transfer foreign protection assumptions. Include credit-line fees, collateral funding, dealer spread, termination fee and tax. A mark is not a guaranteed cash receipt, especially after counterparty distress.

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

A forward can fit an exact-date obligation when credit and collateral cash are manageable. If early cancellation is likely, compare its closeout risks with more flexible alternatives. Decline an apparent hedge with unclear termination method or unaffordable collateral obligations.

Practice and references

Exercise: hypothetical long EUR 20,000 at TRY 40/EUR; current same-date forward 41.50, discount factor 0.98. Calculate model value and compare a dealer payment of TRY 28,500 less a TRY 500 charge. Solution: 20,000 × (41.50 − 40) × 0.98 = TRY 29,400. Dealer pays TRY 28,500 and charges TRY 500, leaving TRY 28,000, TRY 1,400 below model. A positive model mark is not equivalent to cash already collected.

Takeaway: Stress collateral and early invoice cancellation using the actual cash schedule, with every excluded cost and remaining exposure stated.

Reference card: fx-forward. Formula: Simplified forward replacement value. Glossary: Replacement value, Closeout. Next lesson: C3T7L1. Topic test.

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

Shared reference guide | Class examination