Participating Forward Contract

An Illustration of a Participating Forward Contract
A contingent forward contract in which the buyer accepts a floor price below the current forward market in return for a fixed-percentage participation in any favorable difference between the spot at expiration and the floor rate. Although used most frequently in currency markets, the participation structure is also used in equity and debt structures. The diagram illustrates a floor price equal to spot, but the floor could be above spot (but still below the forward price), particularly with a dividend or interest payment on the underlying and a low participation rate. Other things equal, the lower the floor, the higher the participation rate. Also called Ratio Forward. See also Break Forward (diagram), Participation, Participating Interest Rate Agreement (PIRA) (diagram).

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