Target redemption forward (TARF)

A target redemption forward (TARF) allows you to benefit from an improved rate that is much better than the benchmark forward rate, as long as your bonus reserve is not exhausted. The principle is to define before booking the contract, a schedule of monthly or bi-monthly fixings and a bonus reserve expressed in number of "pips". At each observation, we will compare the spot rate to the improved rate. If the spot rate is less favorable than the improved rate, you can buy the notional amount at improved rate using your bonus reserve. If the spot rate is better than the improved rate, you don't use your bonus reserve and you have to buy an amount higher than the notional amount (at the defined ratio) at the improved rate. The strategy is deactivated when the bonus reserve is exhausted, or at expiry of the contract. The reserve is consumed based on the difference in pips between the spot price and the improved price observed at each fixing. Please note that this strategy does not offer a guaranteed protection price and you remain fully exposed to adverse exchange rate fluctuations.

Complexity level :

:

Catégorie : 5 *

Guarenteed protection rate : No

Protection rate level against benchmark forward rate :
N/A

Amount dealt at expiry :
Potentially higher than the notional amount

In what market to use it ?

Participation in a favorable move in spot : No

At each monthly or bi-monthly fixing defined by the schedule, and as long as your bonus reserve is not exhausted: Scenario 1
If the spot rate is less favorable than the improved rate, you can buy the notional amount at improved rate and you are using your bonus reserve for that (number of pips used = improved rate - spot rate).

Scenario 2
If the spot rate is better than the improved rate, you have to buy twice the notional amount at the improved rate and you do not use your reserve of pips for that. At the last fixing, if the remaining number of pips does not allow the improved rate to be reached, then you must buy the notional amount at a rate corresponding to: spot rate + number of remaining pips.

Currency cross	EUR / USD
Side	Buy USD
Contract maturity	12 months
Benchmark forward rate	1,1090
Protection rate level	N/A
Improved rate level	1,1375
Readjusted rate level	N/A
Low barrier level	N/A
High barrier level	N/A
Participation rate	N/A
Ratio	1 : 2
Reserve of points	20 figures
Type of contract	N/A
Frequency of fixings	N/A
Frequency of deliveries	Monthly
Fixing	10 am, New-York time

Advantages

Disadvantages