• Introduction to World First’s Hedging Service
• The Participating Forward
• The Protection Option
• The Risk Reversal

The Participating Forward

A participating forward for a UK couple buying a house in France

Mr and Mrs Jones are due to pay €1m for the balance on a property in France in six months' time. The participating forward provides them with a worst case rate to purchase the euros, when they have to pay for the house. In addition, it also allows them to 'participate' in any favourable exchange rate move for 50% of the amount ie €500,000.

When they agreed the purchase, the exchange rate was 1.25 and the six month forward contract rate was 1.2350. Mr and Mrs Jones were very worried about the falling exchange rate and didn't want to convert at anything worse than 1.20. However, they were optimistic that it might improve so didn't want to be locked in with a forward contract at 1.2350. They chose a participating forward with the worst case rate set at 1.20.

These are two possible outcomes:

The benefit of this option is that if the exchange rate rises, the average rate can be better than the forward rate. The disadvantage is that if the rate falls, they would have been better off booking a forward contract. Like a forward contract, there is no premium to pay when entering into a participating forward.

World First Markets Limited is authorised and regulated by the Financial Services Authority. Our Firm Reference Number is 477561