An FX Knock-out Option is a contract through which an issuer commits to sell a foreign currency on a future date at a more attractive pre-defined rate than the standard forward rate, on condition that the exchange rate does not hit the Knock-out Level at any time during the contract.Due to their complex character, knock-out 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-out options include the following elements:

Financial Asset:  EUR/USD

Position at Maturity:  EUR/USD short

Amount:  1,000,000Spot Rate:  0.9350

Forward Rate:  0.9275

Knock-out Option Rate:  0.9150

Knock-out Level:  0.8800

Tenor: 6 months

Knock out options are speculative products that do not guarantee to hedge against FX risk. If the exchange rate hits the Knock-out level, the option will be cancelled and the buyer will remain exposed to currency volatility.