20 March 2020
Current fluctuations on currency markets can adversely affect the liquidity of companies that have entered into derivative transactions with banks and other financial institutions in order to hedge themselves against the risk of foreign exchange movements.
These derivative transactions are usually governed by any of the master agreements prepared by professional associations, such as ISDA or the Czech Banking Association. As a standard practice in entering into master agreements, financial institutions insist on that the master agreements also contain a provision requiring the client (i.e., the company wishing to be hedged against risks) to provide the particular financial institution with collateral if the financial institution's exposure against the client under the derivative transactions entered into with the client exceeds an agreed threshold. The financial institution's exposure against the client then depends, very simply put, on the loss or profit generated by the financial institution should the transaction be terminated on the calculation date of the exposure. Market conditions on the calculation date can differ quite substantially from those prevailing on the date when the derivative transaction was entered into.