Permjit Singh
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  • About
  • ਪੰਜਾਬੀ
  • Contact
  • Never forget 1984
  • Feedback
  • Books on Sikhi
  • Israel's war criminal
  • Other
    • 1984 remembered - 01 Jun 25 London
    • Vaisakhi Nagar Kirtan 06 Apr 25
    • Tree-planting 03 Apr 25
    • Boycott Israel - Ealing
    • Genocide of Palestinians by Israel
    • Palestine march London 17 May 2025
    • Anti-racism rally London 26 Oct 2024
    • Alcohol addiction - resources
    • Southall Park 29 Nov 2024
    • Published books
    • EAS-Clarion Quiz
    • Feeback form
    • Questions written badly
    • Compounding 2024
    • Food Bank 26 Nov 2024
    • US financial literacy quiz
    • Published articles
    • Hollywood's racists
    • Audio
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17/7/2022

Range forward currency option to manage currency risk

Hedging currency risk with a range forward currency contract

Businesses that are loathe to pay the upfront premium when buying a vanilla currency option can reduce that cost partly or completely, using a range forward currency option or contract.

In essence it involves the purchase of an option whose premium cost is offset by the premium income from selling another currency option.

For example, a UK business exposed to the appreciation of the USD (e.g., it has to make a payment on a specific date in the future) can hedge its exposure by buying a USD call option thereby guaranteeing it will receive no less than the $ strike rate (e.g., $1.50) if the $ appreciates (to say, $1.25). 

To pay for the premium, it can sell a USD put option (at a strike of say $1.75).  If on the payment date the $ has depreciated beyond this (e.g. to $1.80) then the company will receive in effect $1.75 not the more favourable $1.80

If the $ spot rate at maturity is in the range $1.50 to $1.75, the business uses the prevailing spot rate.

To find out how to use Range Forwards or other currency hedging instruments to manage your business's currency risks, contact Permjit Singh for a free chat without obligation.



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