A forward contract which is enhanced with an embedded floor to protect the holder from substantially adverse price movements in the underlying. Generally, the holder of a regular floor pays the seller an option premium against the protection afforded by the floor. However, the holder of a participating forward would not have to pay the premium if he agrees to enable the seller to participate in any gain that may be made on the forward contract. The portion paid to the seller is called the seller’s participation rate. In case there is no gain on this contract, the holder doesn’t pay any amount to the seller for the floor option.
December 21, 2024
