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Range Forward Contract
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An Exchange Rate Range Forward Contract-Rate Pattern at Settlement A contingent forward contract with a collar-type payout in a form used primarily in currency markets. The investor can take advantage of favorable price moves to the upper end of the contract range while remaining protected against moves below the lower end of the contract range. Within the range, the contract settles at the spot rate in effect at maturity. The range is usually chosen so that the customer pays no option premium. As the diagram illustrates, the payoff pattern is identical to an interest rate collar or a equity risk reversal in fixed income and equity markets respectively. Also called Fence or Fence Spread, Cap and Floor, Conversion Spread, Spread Conversion. See also Choke, Equity Risk Reversal (diagram), Interest Rate Collar (diagram), Forward Rate Bracket.
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