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Short Range Forward Contract


A variation of the range forward contract which involves taking two opposite option positions on the same underlying. For example, a firm expects to receive a specified currency amount in the future. It could short a European call option with a set strike price and long a European put option with a lower strike price. The exchange rate the firm looks forward to locking in falls into the range constructed by those two strikes.

If the exchange rate on the future date proves to be less than the lower strike, the put option would be exercised and the firm is able to sell at that strike price. If the exchange rate is within the range, the two options expire unexercised, and the firm receives the currency amount at market rates. Finally, if the exchange rate exceeds the higher strike, the call option is exercised, enabling the firm to sell the currency amount at an exchange rate equal to the higher strike.


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