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A Target Redemption Forward (TARF) allows you to buy or sell foreign currency at an agreed “Enhanced Rate” for a number of expiry dates. But why can't a Target Redemption Forward (TARF) be used as a hedging instrument?

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Since it provides exposure to the FX a TARF can perfectly be used as a hedging instrument. However a TARF contains an optional component (cap on the total payoff) that makes it non linear in the FX and thus makes it depend on the FX volatility as well.

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