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knock-in (knock into) forward

A knock-in forward is a derivative that offers buyers a more attractive rate than a regular forward and includes a condition that the exchange rate must hit a defined knock-in level during the contract. If the “Knock-in level” is not reached, the transaction will not be made on the maturity date.

Due to their complex character, knock-in forwards are not the most suitable products for corporate treasurers wishing to protect their profits from FX risks. There are more efficient alternatives like Dynamic Hedging.

A Knock-In Forward includes the following elements:


Financial Asset:   EUR/USD
Position at Maturity:   EUR/USD short
Amount:   1,000,000
Spot Rate:   0.9350
Forward Rate:   0.9275
Knock-in Forward Rate:   0.9150
Knock-in Level:   0.9050
Tenor:   6 months


Despite the name ‘forward’, this mechanism is more akin to a speculative options contract*. The buyer aims to secure a more convenient rate than a regular forward but risks “losing” the contract. If the knock-in rate is not attained, the contract will be cancelled and their business will not be protected against currency volatility.