Key product features• Full protection at known worst-case rate.
• Payout determined by weighted average of a predetermined set of spot fixings.
• Cash settled versus a predetermined fixing source.
• Less expensive than corresponding Vanilla Option with same strike.
• Downside limited to the upfront premium paid.
Who does this suit?• Clients who trade a series of known EUR amounts on known dates who wish to be cash compensated back to the strike if their average dealt rate proves to be worse than the strike.
• Clients hedging foreign earnings. International Financial Reporting Standards require that these be translated at average exchange rates.
• Clients with Commodity hedges who wish to protect the non-USD price of a commodity
Example trade profile
Effective exchange rate at expiry
Product description/scenario
• The Average Rate Option is a less expensive alternative to a standard Vanilla Option. It provides protection at a worst-case rate, while allowing for participation in favourable spot movements.
• The payout of an Average Rate Option is calculated by comparing the weighted average of a predetermined set of spot fixings to the strike.
Payoff description
• On expiry, the Payout Rate is calculated as the weighted average of spot fixings from predetermined observation dates and times.
• If the Payout Rate is:
– Below the strike (1.2700), the client receives compensation equal to the difference between the Payout Rate and the strike on the full notional.
– At or above the strike (1.2700), the client receives no compensation.
• When this product is used in combination with EUR sales on the same dates and amounts, it effectively provides a worst case average EUR selling rate of the strike.
Variations
• Double Average Rate Option:
– Strike not pre-agreed, but also calculated from a weighted average of spot fixings (different from those used for Payout Rate)
• Average Rate Collar:
– As with Vanilla Collar, except i) cash settled and ii) Payout Rate (which can be negative) is weighted average of fixings on pre-agreed dates
• Average Rate Forward:
– As with Vanilla Forward, except i) cash settled and ii) Payout Rate (which can be negative) is weighted average of fixings on pre-agreed dates
Forex Product - Average Rate Option
Linear Mode
