knock-out (knock into) forward

A Knock-out Forward is a derivative financial product through which the issuer offers the buyer a more attractive rate for a specific maturity date than a regular forward on condition that the exchange rate does not hit the Knock-out level during the contract. If the Knock-out level is attained, the contract is automatically cancelled and the transaction will not take place.

Due to their complex character, knock-out 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.

Knock-out forward contracts include the following elements:

Despite the name ‘forward’, a knock-out is actually a speculative options contract* and therefore not the most suitable option for a prudent CFO aiming to hedge against currency volatility. If the Knock-out rate is reached, the option will be cancelled and the buyer will remain exposed to currency volatility.