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?
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.
Have a slightly different take. While a TARF provides exposure to FX, it tends to knock out when you need it the most (i.e. when the TARF is deep ITM/when spot has moved substantially against you on the underlying), leaving you naked on your underlying exposure, and is therefore not a proper hedge.