0
$\begingroup$

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?

$\endgroup$
  • $\begingroup$ it depends what you're hedging... $\endgroup$ – will Sep 12 at 17:53
1
$\begingroup$

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.

$\endgroup$
1
$\begingroup$

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.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.