Range Forward Contract

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.

BREAKING DOWN '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 Exchange Contract

    A special type of foreign currency transaction. Forward contracts ...
  2. Outright Forward

    A forward currency contract with a locked-in exchange rate and ...
  3. Currency Forward

    A binding contract in the foreign exchange market that locks ...
  4. Forward Market

    An over-the-counter marketplace that sets the price of a financial ...
  5. Forward Contract

    A customized contract between two parties to buy or sell an asset ...
  6. Long Dated Forward

    A type of forward contract commonly used in foreign currency ...
Related Articles
  1. Professionals

    Currency Forward Contracts

    CFA Level 1 - Currency Forward Contracts. Discusses the uses and key points of currency forward contracts. Provides an example of how corporations use currency forwards to hedge risk.
  2. Forex Education

    How To Lock In An Exchange Rate

    Currency risk can be effectively hedged by locking in an exchange rate through the use of currency futures, forwards, options, or exchange-traded funds.
  3. Options & Futures

    Why Forward Contracts Are The Foundation Of All Derivatives

    This article expands on the complex structure of derivatives by explaining how an investor can assess interest rate parity and implement covered interest arbitrage by using a currency forward ...
  4. Forex Education

    4 Reasons Currency Hedging is Important

    Learn how currency hedging can help reduce exchange rate risk for a portfolio of foreign stocks. Consider the cost of hedging and its potential benefits.
  5. Forex Strategies

    The Money Market Hedge: How It Works

    Investopedia explains how to hedge foreign exchange risk using the money market, the financial market in which highly liquid and short-term instruments like Treasury bills, bankers’ acceptances ...
  6. Term

    The Difference Between Forwards and Futures

    Both forward and futures contracts allow investors to buy or sell an asset at a specific time and price.
  7. Mutual Funds & ETFs

    3 Strategies to Mitigate Currency Risk (EUFX)

    Discover the often overlooked risk known as currency risk, and learn three strategies to mitigate or eliminate it in your portfolio.
  8. Professionals

    Fundamental Differences Between Futures and Forwards

    CFA Level 1 - Fundamental Differences Between Futures and Forwards. Learn the fundamental differences between futures and forward contracts. Contrasts how and where they trade and discusses marking ...
  9. Investing Basics

    What is a Forward Contract?

    A forward contract is a customized contract between two parties to buy or sell an asset at a specified price on a future date.
  10. Forex Education

    Forex Tutorial: What is Forex Trading?

    What Is Forex?The foreign exchange market is the "place" where currencies are traded. Currencies are important to most people around the world, whether they realize it or not, because currencies ...
RELATED FAQS
  1. What is a forward contract against an export?

    Understand forward exchange contracts in exporting, and learn the purpose of using a forward contract and its advantages ... Read Answer >>
  2. What is the difference between a forward rate and a spot rate?

    Learn about spot and forward contracts, how spot and forward rates are used for spot and forward contracts, and the difference ... Read Answer >>
  3. How is a share premium account taxed?

    Understand the difference between a spot rate and forward rate. Learn why someone would enter into a contract with a spot ... Read Answer >>
  4. Over what time period should I be looking at the forward rate?

    Read about forward rates and forward prices, how they function, and which rates you should look at based on your own investment ... Read Answer >>
  5. Why is the initial value of a forward contract set to zero?

    Discover why the initial value of a forward contract is set to zero; read about financial mathematics and exchange logic ... Read Answer >>
  6. What types of companies benefit from reporting results utilizing constant currencies ...

    Understand constant currency figures, and explore some of the reasons why a company is likely to benefit from reporting using ... Read Answer >>
Hot Definitions
  1. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  2. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  3. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  4. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  5. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  6. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
Trading Center