Forward extra with European barrier option

For whom it is intended:

• Particularly for legal entities

Definition: 

A forward extra with European barrier option is a combination of a plain vanilla currency option and currency barrier options (European style knock-in). This relates to a zero cost option strategy in which one party purchases a right to buy or to sell a given currency and at the same time sells a right to buy or to sell that same currency. Activation of the barrier option only can occur at the expiry date of that currency barrier option.

The notional amounts of the two options are the same.

Advantages of the product:

• 100% hedging against unfavourable market development
• Potentially exceeding the barrier during the life of the option does not matter; reaching the barrier exchange rate is monitored until the day of the barrier option’s expiry.

Disadvantages of the product:

• A narrower band in which to participate in favourable market development

Variations of the product:

Forward extra with American barrier option – The difference consists in that the reaching of the barrier exchange rate is monitored continuously at all times from the day of agreeing the transaction until the day of expiry.

• An advantage is the wider band in which to participate in favourable market development.
• A disadvantage is the higher probability of reaching the barrier exchange rate and activation of the barrier option.

Conditions of concluding a transaction:

• Master Agreement for Financial Transactions
• Limit for treasury operations
• Minimum volume of EUR 100,000

For more information, please contact your bank advisor.