Range Forward Contract

AAA

DEFINITION of '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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. Forward Contract

    A customized contract between two parties to buy or sell an asset ...
  2. Currency Forward

    A binding contract in the foreign exchange market that locks ...
  3. Synthetic Forward Contract

    A position in which the investor is long a call option and short ...
  4. Forward Rate

    A rate applicable to a financial transaction that will take place ...
  5. Forward Price

    The predetermined delivery price for an underlying commodity, ...
  6. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the ...
RELATED FAQS
  1. How do I calculate a forward rate in Excel?

    You need to have the zero-coupon yield curve information to calculate forward rates, even in Microsoft Excel. Once the spot ... Read Full Answer >>
  2. Can delta be used to calculate price volatility of an option?

    The delta of an option is a component of the Black-Scholes option pricing formula, which provides the implied volatility ... Read Full Answer >>
  3. How is fair value calculated in the futures market?

    The fair value is the theoretical calculation of how a futures stock index contract should be valued considering the current ... Read Full Answer >>
  4. What are the major types of insurance policies that insurance companies will offer?

    The principal commodities used in producing chemicals are oil, natural gas, coal and a wide variety of metals and minerals. ... Read Full Answer >>
  5. How valuable is the forward rate as an overall economic indicator?

    Any given forward rate is theoretically equal to its corresponding spot rate plus future expectations. Many investors and ... Read Full Answer >>
  6. What is the difference between speculation and hedging?

    Speculators and hedgers are different terms that describe traders and investors. Speculation involves trying to make a profit ... Read Full Answer >>
Related Articles
  1. Forex Education

    Currency Exchange: Floating Rate Vs. Fixed Rate

    Baffled by exchange rates? Wonder why some currencies fluctuate while others are pegged? This article has the answers.
  2. Forex Education

    How To Profit From Interventions In The Forex Market

    The forex market can be extremely profitable. Learn how to spot an intervention and trade when it's occurring.
  3. Active Trading

    How Companies Use Derivatives To Hedge Risk

    Derivatives can reduce the risks associated with changes in foreign exchange rates, interest rates and commodity prices.
  4. Forex Education

    Forex: Should You Be Trading Trend Or Range?

    In FX, it's not the price environment that decides this for you. Learn the differences to see which you prefer.
  5. Options & Futures

    Forecast The FX Market With The COT Report

    Three empirical findings on futures data can help currency traders determine buy and sell points.
  6. Investing

    The Strong Dollar’s (Real) Toll On Tech Stocks

    A large portion of U.S. technology companies’ sales occur overseas, given the strong international business and consumer demand from many U.S. tech firms.
  7. Charts & Patterns

    Should Investors Get Into Oil Now?

    Oil has enjoyed a steady climb after a violent plunge. Where is it going next, and how can investors profit?
  8. Investing Basics

    Understanding Non-Deliverable Forward (NDF)

    A foreign exchange hedging strategy where the parties agree to settle the profit or loss in a foreign currency futures contract before the expiration date.
  9. Investing Basics

    Explaining Currency Swaps

    A swap that involves the exchange of principal and interest in one currency for the same in another currency.
  10. Investing Basics

    Understanding Notional Value

    This term is commonly used in the options, futures and currency markets because a very small amount of invested money can control a large position.

You May Also Like

Hot Definitions
  1. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  2. Productivity

    An economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in ...
  3. Variance

    The spread between numbers in a data set, measuring Variance is calculated by taking the differences between each number ...
  4. Terminal Value - TV

    The value of a bond at maturity, or of an asset at a specified, future valuation date, taking into account factors such as ...
  5. Rule Of 70

    A way to estimate the number of years it takes for a certain variable to double. The rule of 70 states that in order to estimate ...
  6. Risk Premium

    The return in excess of the risk-free rate of return that an investment is expected to yield. An asset's risk premium is ...
Trading Center