A range forward contract which involves taking two opposite option positions on the same underlying. For example, a firm expects to pay a specified currency amount in the future. It could short a European put option with a specific strike price and long a European call option with a higher strike price. The exchange rate the firm looks forward to locking in falls into the range constructed by those two strikes.
If the exchange rate on the future date proves to be less than the lower strike, the put option would be exercised because the firm is obliged to buy at that price. Here, the firm receives the currency amount it needs at an exchange rate equal to the lower strike. If the exchange rate is within the range, the two options expire unexercised, and the firm purchases the currency amount at market rates. Finally, if the exchange rate exceeds the higher strike, the call option is exercised, enabling the firm to obtain the needed currency amount at an exchange rate equal to the higher strike.
