As a fictional example, a corporate client enters into an FX forward with a bank as a hedge against a weaker yen raising its import payments. In the client business flow, which of the following belongs to the stage from the trade to maturity?
Quiz: Up to the Trade
Last reviewed: September 26, 2026
This is a draft, shown for review before publication.
7 questions to check your understanding of the chapter “Up to the Trade”. Choose an answer and select “Check answer” to see the answer and explanation. You can also open “Answer and explanation” to see the answer first.
Question 1
Answer and explanation
Answer: C
The stage from the trade to maturity includes telling the client, at its request, the market value of the trade and the termination payment at that point. The Financial Services Agency's "Comprehensive Guidelines for Supervision of Major Banks, etc." include follow-up until maturity in a bank's explanation arrangements. The bank checks whether the hedge is still working effectively in light of the client's business conditions and its actual imports. If the client asks, the bank tells it the market value and the termination payment so that it can use them for its financial statements or for deciding whether to terminate.
The other three belong to the stage before the trade. Verification at the time of transaction is the part of know your customer (KYC) that the Act on Prevention of Transfer of Criminal Proceeds requires of banks and others. For a corporate client, it covers matters such as the purpose of the transaction and the nature of the business. In the credit review, the credit review department reviews the client's creditworthiness and sets a credit limit.
The written explanation also comes before the trade, and the termination payment appears there too. Before the trade, the bank explains in a document with examples the loss under the worst-case scenario and the termination payment that would be paid or received if the trade were terminated early. It then confirms that the client received the explanation and keeps a record. What the bank reports after the trade is the termination payment at that point.
Learn more: The Client Business Flow
Question 2
As a fictional example, an exporter expects to receive USD 4 million in a lump sum in one year. It sets its hedge ratio, the share of the actual needs that it hedges, at 50%. For that amount, it enters into an FX forward to sell dollars at 145 yen per dollar in one year. It converts the rest into yen at the rate on the day it receives the dollars. If the rate on that day is 135 yen per dollar, how much does it receive in yen in total?
Answer and explanation
Answer: B
The exporter receives 560 million yen. With a hedge ratio of 50%, the forward covers half of USD 4 million, or USD 2 million. The hedged part brings in USD 2 million × 145 yen = 290 million yen. The remaining USD 2 million are converted at that day's rate, giving USD 2 million × 135 yen = 270 million yen. The total is 560 million yen.
Converting all USD 4 million at 145 yen gives 580 million yen, the amount for a hedge ratio of 100%. Converting everything at that day's rate gives 540 million yen, the amount without a hedge. The figure of 290 million yen counts only the hedged part and leaves out the remaining USD 2 million.
The rate can also move the other way. If the rate on the day of receipt is 155 yen per dollar, the unhedged USD 2 million bring in USD 2 million × 155 yen = 310 million yen. With the 290 million yen from the forward, the total at a ratio of 50% is 600 million yen. Without a hedge, the exporter would receive USD 4 million × 155 yen = 620 million yen. So the total at a ratio of 50% is 20 million yen more than without a hedge at 135 yen, and 20 million yen less at 155 yen. The higher the ratio, the less the amount depends on the rate, but the smaller the gain when the rate moves in the exporter's favor.
Learn more: Understanding Client Needs
Question 3
As a fictional example, a stock company starts OTC derivative trades with a financial institution. Its founder (an individual), who is not currently a director, directly holds 30% of its voting rights, and no other shareholder holds more than one-quarter of them. The president is a different person from the founder, and the head of finance carries out the procedure with the financial institution on the company's behalf. In verification at the time of transaction under the Act on Prevention of Transfer of Criminal Proceeds, whose identifying information does the institution confirm as the beneficial owner's?
Answer and explanation
Answer: A
The beneficial owner is the founder. A beneficial owner is an individual who can effectively control a corporation's business. For a stock company, this is an individual who holds, directly or indirectly, more than one-quarter of the total voting rights. The founder holds 30% of the voting rights and so qualifies, even without being a director.
An individual who represents the corporation and executes its business, such as the president, becomes the beneficial owner only in one case. That is when there is neither an individual holding more than one-quarter nor an individual with a dominant influence on the business through investment, financing, trading, or other means. This company has the founder, so the president does not qualify.
The head of finance is the individual who actually carries out the procedure on the company's behalf (a representative). The institution also confirms the representative's name, address, and date of birth, but not as the beneficial owner. Verification at the time of transaction for a corporate client covers four matters: its name and the location of its head office, the purpose of the transaction, the nature of its business, and the identifying information of its beneficial owner.
Learn more: KYC and Credit Review
Question 4
As a fictional example, a corporate client plans to pay USD 2 million for imports in one year. The sales representative proposes an FX forward to buy USD 2 million at 150 yen per dollar in one year, and the proposal's worst-case scenario is 110 yen per dollar. The client can tolerate a loss of 40 million yen, and fees are ignored. At what spot exchange rate in one year does the loss on the FX forward exactly equal the tolerable amount?
Answer and explanation
Answer: B
The loss exactly equals the tolerable amount at 130 yen per dollar. The profit or loss on the FX forward is (spot rate in one year − 150 yen) × USD 2 million. At a spot rate of 130 yen, this is (130 yen − 150 yen) × USD 2 million = −40 million yen, so the loss equals the tolerable 40 million yen. If the yen strengthens past 130 yen per dollar, the loss exceeds the tolerable amount.
110 yen is the level of the worst-case scenario. The loss there is (110 yen − 150 yen) × USD 2 million = −80 million yen, and this is the estimated maximum loss. The loss reaches the tolerable 40 million yen at 130 yen, before the rate gets to the worst-case 110 yen, and exceeds it if the yen strengthens further. When there is a rate at which the tolerable amount is exceeded like this, the sales representative explains it so that the client understands.
170 yen comes from getting the direction of the loss wrong. If the yen weakens to 170, the client buys the dollars 40 million yen more cheaply than at spot, so it gains 40 million yen. As long as the client pays for the imports as planned, its payment is 150 yen × USD 2 million = 300 million yen whatever the rate. The loss on the forward becomes the client's own loss when the imports disappear, for example because the business shrinks.
Learn more: Proposals and Explanations
Question 5
As a fictional example, a corporate client that is not a professional investor enters into three OTC derivatives transaction contracts of the same kind (on June 1, 2026, December 1, 2026, and August 1, 2027). Before the first contract, the financial institution provided the information under Article 37-3 of the Financial Instruments and Exchange Act in writing. It did not provide it before the second, and it gave no concise key information. Does the institution need to provide the information before the third contract?
Answer and explanation
Answer: D
The information must be provided before the third contract. A document setting out the information under Article 37-3 of the Financial Instruments and Exchange Act is called a pre-contract document. The information need not be provided if it was provided in writing or by electromagnetic means for a contract of the same kind within one year before the contract (Article 80, paragraph 1, item 1 of the Cabinet Office Order on Financial Instruments Business, etc., the "Cabinet Office Order"). The third contract, on August 1, 2027, is more than one year after the first provision on June 1, 2026.
For trades that are not OTC derivatives transaction contracts in the Cabinet Office Order's sense, entering into a contract of the same kind within one year of the provision counts as providing the information on that date. The start of the one-year period then moves forward. OTC derivatives transaction contracts are excluded from this deeming rule. So the start of the period stays June 1, 2026, despite the second contract. If these trades were not OTC derivatives transaction contracts, the start would move to December 1, 2026, and the third contract would be within one year, so no provision would be needed.
Even for trades of the same kind, this exception covers only contracts entered into within one year of the provision. The exception for information provided within one year does itself apply to OTC derivatives transaction contracts. The second contract was within one year of the first, so no provision was needed then. The exception for cases where none of the required items change is for contracts that amend part of an existing contract, and it does not cover the third contract, which is a new one.
Learn more: Product Explanations and Pre-Contract Disclosures
Question 6
As a fictional example, a corporate client pays USD 1 million a month for imported raw materials and has FX forwards with a bank to buy USD 1 million a month for two years (24 months). A review six months after the contract finds that its imports are expected to fall to USD 700,000 a month from then on. Over the remaining period, how much of the FX forwards exceeds the actual needs in total?
Answer and explanation
Answer: A
The amount exceeding the actual needs is USD 5.4 million in total. The remaining period is 24 months − 6 months = 18 months. The monthly excess is USD 1 million − USD 700,000 = USD 300,000. In total, this comes to USD 300,000 × 18 months = USD 5.4 million.
USD 7.2 million counts all 24 months, including the six months that have already passed (USD 300,000 × 24 months). Imports had not yet fallen in those six months, so the forwards did not exceed the actual needs. USD 12.6 million is the actual needs over the remaining 18 months (USD 700,000 × 18 months), which is the part of the forwards that still has something to hedge.
The part that exceeds the actual needs is a position with nothing to hedge, and it can gain or lose depending on the rate. Even after the contract, the bank reviews the hedge regularly and as needed. Taking into account the client's business conditions and financial position, it checks whether the hedge is effective in light of the actual needs and whether the client can keep it in place. Even if the hedging instrument itself shows no loss, it may stop working as a hedge before the end of the contract, for example because the business shrinks. After such a review, the client may also consider ending the contract before maturity (early termination).
Learn more: Suitability Checks
Question 7
As a fictional example, a financial institution's sales representative quotes a corporate client's treasurer a tradable price of 140.00 yen per dollar by phone for an FX forward to sell USD 1 million in one year. The treasurer answers that the client will trade at that price, and the institution accepts. Later that day the market moves, and the price for the same terms becomes 139.50 yen per dollar. The trade confirmation has not yet been exchanged. Which of the following correctly describes how this trade is treated?
Answer and explanation
Answer: C
The trade was done when the financial institution accepted the client's answer, and the terms at 140.00 yen per dollar do not change. A contract is formed when the other party accepts an offer, and unless a law provides otherwise, no written form is needed. Under this trade, the client is committed to delivering USD 1 million and receiving 140 million yen in one year.
A confirmation records the agreed terms in writing so that each side can check its records against the other's and catch errors. It does not bring the trade into effect. The agreed terms cannot easily be changed afterward, even before confirmations are exchanged. If the price were reset to 139.50 yen, the client would receive 139.5 million yen, or 500,000 yen less. If the market had instead moved to 140.50 yen, the terms would still be 140.00 yen, and the client would not receive 500,000 yen more.
Learn more: Trade Execution