Range Forward Contract
Range Forward Contract
What is 'Range Forward Contract'
A zero-cost currency forward contract that uses a range of exchange rates rather than a single rate. A range forward contract is constructed so that it provides full protection against adverse exchange rate movements, while retaining some upside potential to capitalize on favorable currency fluctuations. It is generally used by companies and international traders for hedging currency exposure at little or no cost.
Explaining 'Range Forward Contract'
As an example, consider a U.S. company that has a EUR1 million export order from a European customer. The company is concerned about the possibility of a sudden plunge in the euro (which is trading at 1.30 to the USD) over the next three months - when payment is expected - and wishes to hedge this exposure while retaining some upside.
The company could negotiate with its financial institution a three-month range forward contract that has a floor at EUR1.27 and a cap at EUR1.33. If at expiry the spot exchange rate is EUR1 = US$1.31, the contract settles at the spot rate (since it is within the 1.27 - 1.33 range). On the other hand, if the exchange rate at expiry is EUR1 = US$1.25, the company gets the floor rate of 1.27. Conversely, if the exchange rate at expiry is EUR1 = US$1.36, the company gets the cap rate of 1.33.
Range Forward Contract FAQ
What is range forward contract?
What is Range Forward OTC?
What is forward contract example?
How do forward contracts work?
What are the problems of forward markets?
How do you close a forward contract?
How is future contract better than forward contract?
Further Reading
ieeexplore.ieee.org [PDF]
Abstract--For hedging the market risk,the electrical forward contracts are subjected to the extensive concern and research. A new electricity range forward contract with bilateral financial options is introduced, which allows both seller and buyer to take advantage of flexibility in …
ageconsearch.umn.edu [PDF]
Abstract--For hedging the market risk,the electrical forward contracts are subjected to the extensive concern and research. A new electricity range forward contract with bilateral financial options is introduced, which allows both seller and buyer to take advantage of flexibility in …
papers.ssrn.com [PDF]
Abstract--For hedging the market risk,the electrical forward contracts are subjected to the extensive concern and research. A new electricity range forward contract with bilateral financial options is introduced, which allows both seller and buyer to take advantage of flexibility in …
jii.pm-research.com [PDF]
Abstract--For hedging the market risk,the electrical forward contracts are subjected to the extensive concern and research. A new electricity range forward contract with bilateral financial options is introduced, which allows both seller and buyer to take advantage of flexibility in …
ieeexplore.ieee.org [PDF]
Abstract--For hedging the market risk,the electrical forward contracts are subjected to the extensive concern and research. A new electricity range forward contract with bilateral financial options is introduced, which allows both seller and buyer to take advantage of flexibility in …
onlinelibrary.wiley.com [PDF]
Abstract--For hedging the market risk,the electrical forward contracts are subjected to the extensive concern and research. A new electricity range forward contract with bilateral financial options is introduced, which allows both seller and buyer to take advantage of flexibility in …
onlinelibrary.wiley.com [PDF]
Abstract--For hedging the market risk,the electrical forward contracts are subjected to the extensive concern and research. A new electricity range forward contract with bilateral financial options is introduced, which allows both seller and buyer to take advantage of flexibility in …