A KIKO forward extra allows you to secure a protection rate (slightly less favourable than the benchmark forward rate), while allowing you to take 100% advantage from a favourable move in the spot rate at expiry, provided that the spot rate at expiry is not below the knock-in barrier. Nevertheless, you may be obligated to sell an amount higher than the notional amount (at protection rate and within the limit of the defined ratio) if the spot rate at expiry is below the knock-in barrier. There is a high barrier which, if touched during the lifetime of the contract, releases you from any obligation without removing your right to sell the notional amount at protection rate.
Complexity level : 
:
Catégorie : 3 *
Guarenteed protection rate : 
Protection rate level against benchmark forward rate :
Slightly less favourable
Amount dealt at expiry :
Potentially higher than the notional amount
In what market to use it ?
Participation in a favorable move in spot :
Hypothesis A : If during the lifetime of the contract, the high barrier has not been touched:
Scenario A1
At expiry, if the spot rate is less favourable than the protection rate, you can sell the notional amount at protection rate.
Scenario A2
At expiry, if the spot rate is between the protection rate and the knock-in barrier rate, you can sell the amount of your choice at spot rate.
Scenario A3
At expiry, if the spot rate is below the knock-in barrier, you must sell twice the notional amount at protection rate.
Hypothesis B : If during the lifetime of the contract, the high barrier is touched, you are released from any obligation, thus:
Scenario B1
At expiry, if the spot rate is less favourable than the protection rate, you can sell the notional amount at protection rate.
Scenario B2
At expiry, if the spot rate is better than the protection rate, you can sell the notional amount at spot rate
| Currency cross |
EUR / USD |
| Side |
Sell USD |
| Contract maturity |
6 months |
| Benchmark forward rate |
1,109 |
| Protection rate level |
1,1125 |
| Improved rate level |
N/A |
| Readjusted rate level |
N/A |
| Low barrier level |
1,0800 |
| High barrier level |
1,1350 |
| Participation rate |
100% |
| Ratio |
1 : 2 |
| Reserve of points |
N/A |
| Type of contract |
Low barrier: AmericanHigh barrier : European |
| Frequency of fixings |
N/A |
| Frequency of deliveries |
N/A |
| Fixing |
10 am, New-York time |
Advantages
- You benefit from a guaranteed protection rate whatever the movements in the exchange rate
- You benefit from a favourable move in the spot rate in the limit of the knock-in barrier rate if the high barrier has not been touched, and without limit if the high barrier has been touched
Disadvantages
- The protection rate is slightly less favourable than the benchmark forward rate
- Participation in the favourable move in the spot rate is limited to the level of the knock-in barrier and cancelled beyond (if the high barrier has not been touched)
- You may be obligated to sell an amount higher than the notional amount