Forward Knock Out

Knock Out forward product allows the hedger to make his hedge from a better rate than the forward rate if market does not reach to a predefined Knock Out level. The knock out event triggers when market moves in favor of the hedger, because hedger buys a reverse knock out option and sells a regular knock out option. The difference of Forward Knock Out from normal forward product is its better rate and the Knock Out level.


Applications:

Although KO Forward offers very advantage rate according to normal forward rate, this product does not guarantee % 100 protection for the hedger. It should be used very carefuly for hedging.


 Advantages:

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

-              Product is formed costless

 Disadvantages:

-              If market touches to Knock Out level through the life of the product hedger losses its protection.

  • Financial Asset                                   : USD/TRY
  • Position at maturity                           : USD/TRY Long
  • Amount                                                 : USD 1,000,000
  • Spot Rate                                             : 1.550
  • Forward Rate                                      : 1.5580
  • Forward Knock Out Rate                  : 1.5400
  • Knock Out Level                                 : 1.6500
  • Advantage according to forward   : 180 ticks
  • Tenor                                                     : 30 days


    The payoff chart of the above example is below,

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