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Derivatives

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  • August 6, 2021
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Knock-Out Forward

A forward contract which has a knock-out barrier, allowing the holder whereby to avoid unfavorable moves in spot price down to a pre-specified limit. If the knock-out barrier is triggered, the holder will have to proceed with the trade at the strike price. The barrier can only be touched, and hence immediately terminates the embedded option, if the forward is moving out of the money. Otherwise, at expiration, with the barrier never having been hit, the underlying forward contract gets activated as a regular contract.


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