Target Redemption Forward

A better rate that stops once you have won enough

A target redemption forward is a strip of forwards dealt at a rate better than the market, which terminates as soon as the client’s cumulative gain reaches an agreed target. On fixings that go the other way there is no target and no termination — instead the notional is usually doubled. It is sold as a zero-cost hedge, and its defining feature is that the protection ends when it is working while the obligation continues, at twice the size, when it is not.

Open in the app · Exotics · advanced

Exotics is part of the OTC Learn subscription. Everything the app shipped with — 36 products across six asset classes — stays free.

What the lesson covers

1. What it is
2. How it works
3. Why it’s used
4. Why it is not a hedge
5. Risks to watch

Key terms

• Target — The cumulative gain that, once reached, redeems the structure and cancels all remaining fixings.
• Gearing ratio — The multiple applied to the notional on fixings that settle against the client, usually two.
• Enhanced strike — The better-than-forward rate the client deals at, funded by the options it has implicitly sold.
• Redemption — Early termination of the whole strip once the target is reached, whatever fixings remain.
• Knock-in knock-out forward — A close relative pairing a barrier that cancels protection with one that activates a geared obligation.
• Pivot TARF — A variant with two strikes, paying inside a band and gearing outside it on either side.

In practice

TARFs are quoted by bank FX structuring desks to corporate treasuries and to funds running carry strategies, most heavily in currencies with a wide forward premium — the rupee, the real, the lira, the won. Regulatory reporting requirements mean the volumes are now visible in trade repositories, which was not true in 2008.

Read next

• Accumulator — Buy at a discount daily, until it goes wrong
• FX Forward — Lock in a future exchange rate
• Non-Deliverable Forward — A cash-settled forward for restricted currencies

In the app, Target Redemption Forward carries a five-step lesson, a worked example and a bank of twelve questions drawn differently every sitting.

Get OTC Learn on Google Play

Educational content only. Nothing here is financial advice, an offer to trade, or a recommendation to buy or sell any instrument.