Demand for target forwards has taken off in the past two years as liability managers look for more precise ways to manage their foreign exchange (FX) exposures. George Nunn and PK Sinha explore what these 'targeted' FX hedging tools can do and how to risk-manage them
The last few years have seen an explosion in the use of the 'target' family of foreign exchange (FX) products. Target forwards were first introduced in mid-2005 in response to the specific hedging requirements of Asian clients. The need for liability managers to meet their budgeted FX rates without losing the entire hedge at a barrier FX rate (as with traditional knock-out forwards) was the driver for the development of target forwards.
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