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?
Range forward contracts are developed to give settlement to assets within a range of prices. They require two derivative market positions which makes a reach for settlement at a future time. A broker in a ranger forward contracts must take a long and short position through two derivative agreements.
What is Range Forward OTC?
An FX collar utilizing forward agreements that imitates the payoff profile of buying an in the money-call and selling an in the money-put.
What is forward contract example?
A forward contract is a kind of derivative. For instance, commodities, foreign currencies, market files, and individual stocks would all be able to be fundamental resources for derivatives. In a forward contract, the purchaser and merchant consent to purchase or sell a fundamental asset at a value the two of them concur on at a setup future date.
How do forward contracts work?
In a forward contract, the purchaser and merchant consent to purchase or sell a fundamental asset at a value the two of them concur on at a setup future date. This agreed value is called the forward price. This agreed value is calculated using the spot price and the risk-free rate.
What are the problems of forward markets?
Forward Markets overall are distressed by a few issues like LACK OF CENTRALIZATION OF TRADING, LIQUIDITY, and COUNTERPARTY RISK. In the initial two issues, the essential problems are adaptability and generality.
How do you close a forward contract?
To close out a Forward contract, proceed with the conveyance or taking conveyance as indicated by the terms and determinations of the contract. Roll the contract forward to a future date at current rates. Closeout the contract by purchasing or selling a balancing contract at winning market rates.
How is future contract better than forward contract?
A forward agreement is a private and adjustable agreement that settles when the agreement ends and is exchanged over-the-counter. A future contract on the other hand, has normalized terms and is exchanged on a trade, where costs are chosen on a consistent daily schedule until the contract ends.
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 …
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