Break Forward

Break Forward
An option-like mechanism used primarily in the currency markets to obtain full participation in a move in the underlying beyond a specified level without payment of an explicit option premium. The party long the break forward contract typically agrees to sell the underlying forward at a discount, or load, below the prevailing forward rate. The expected present value of this load pays for an option to cancel the forward agreement should the underlying rise above a predetermined level. The greater the load, the lower the price at which the holder of the option can cancel the forward agreement. Also called Boston Option (1), Cancelable Forward Exchange Contract, Cancelable Option, Forward Break, Conditional Forward Purchase Contract, Forward with Optional Exit (FOX), GUARanteed Rate on Delivery (GUARD), Knock-Out Forward, Trigger Forward, Forward Reserve Option. See also Load (3), Participating Forward Contract (diagram).