Knock-out forward

A knock-out forward allows you to benefit from an improved rate that is better than the benchmark forward rate, provided that the level of the spot rate at expiry is below the knock-out barrier. Nevertheless, this strategy does not offer a guaranteed protection rate and you remain fully exposed to adverse exchange rate fluctuations.

Complexity level :

:

Catégorie : 4 *

Guarenteed protection rate : No

Protection rate level against benchmark forward rate :
N/A

Amount dealt at expiry :
Same as the notional amount

In what market to use it ?

Participation in a favorable move in spot : No

Scenario 1
At expiry, if the spot rate is less favourable than the knock-out barrier rate, you no longer benefit from the improved rate, but you can still sell the amount of your choice at spot rate.

Scenario 2
At expiry, if the spot rate is between the knock-out barrier rate and the improved rate, you can sell the notional amount at improved rate.

Scenario 3
At expiry, if the spot rate is better than the improved rate, you must sell the notional amount at improved rate.

Currency cross	EUR / USD
Side	Sell USD
Contract maturity	6 months
Benchmark forward rate	1,109
Protection rate level	N/A
Improved rate level	1,0910
Readjusted rate level	N/A
Low barrier level	N/A
High barrier level	1,1400
Participation rate	N/A
Ratio	1 : 1
Reserve of points	N/A
Type of contract	European
Frequency of fixings	N/A
Frequency of deliveries	N/A
Fixing	10 am, New-York time

Advantages

Disadvantages