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knock-in options

An FX Knock-in Option contract allows the buyer to purchase a foreign currency on a future date, and at a pre-defined rate that’s better than the regular forward rate, on condition that the exchange rate hits the Knock-in level at any time during the contract.

Due to their complex character, knock-in options 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.

Knock-in options include 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 Option Rate:   0.9150
Knock-in Level:   0.9050
Tenor:   6 months

 

Knock in options are speculative products, as they do not provide guaranteed protection from currency volatility. If the Knock-in level is not attained, the option will not be activated and the buyer will remain exposed to currency volatility.