A combination of a forward contract and a trigger option, whereby the buyer can enter into an outright forward at a rate better than the prevailing market rate, with the condition that if the underlying rate reaches or breaches a preset trigger level, the forward structure knocks out or deactivates. For example, if the outright forward rate for USD/Euro was 0.9, it possible to construct a trigger forward by which the buyer can sell dollar against euro at a 0.85 rate in six months’ time unless a 1.1 rate is reached during that period. If the underlying rate trades at 1.1, the contract knocks out.
January 31, 2024