Forward Extra

Hedger has the right (not obligation) to make his FX hedge from a little worse rate than the forward level at Forward Extra if the market does not touch to a pre defined Knock In level. The Knock In level is generaly deeply out of the money according to the hedger's position. If hedger needs to buy the underlying asset then Knock In level is lower tha the current spot rate. If through the life of the product market touches to Knock In level, hedger right at the Forward Extra level becomes an obligation. Hedger will have an obligation to do the hedging transaction a little worse rate than the normal forward rate.


Applications:

Product is very useful for hedging purposes. Because hedger has a % 100 protection against the market moves and also has flexiblity to do hedging from a better rate if the market does not touch to Knock In level.

 Advantages:

-              Hedger makes the transaction from a better rate than the forward price.

-              Hedger has no obligation to do the fx transaction if market does not touch to Knock In level, which is far away the current spot level.

-              Product is formed costless

 Disadvantages:

-              If market touches to Knock In level hedger will have the obligation to do the transaction level, which is at a disadvantage level according to the spot level at Knock In event.

  • Financial Asset                                   : USD/TRY
  • Position at maturity                           : USD/TRY Long
  • Amount                                                 : USD 1,000,000
  • Spot Rate                                             : 1.550
  • Forward Rate                                      : 1.5580
  • Forward Extra Rate                           : 1.5650
  • Knock In Level                                   : 1.3500
  • Tenor                                                     : 30 days



    The payoff chart of the above example is below,

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