Why buy a Ratio Par Forward?
Unlike a regular synthetic forward which guarantees an exchange rate on the expiry date, the different notionals in the call and put in the participating forward let you benefit from a favorable spot move, while insuring you are fully hedged in the event of an adverse spot move.
Because of the difference in notional, a Ratio Par Forward allows the customer get a better forward rate than they would normally get in a normal synthetic forward situation. It can also be structured into a zero cost strategy where the buyer don't need to pay any premium up front.
A single Ratio Par Forward trade may have a single leg of two option, or it can be stripped into multiple legs with each legs expirying at different tenor.
Example of a ratio par forward
A hedger needs to buy EUR 10 mio one year from now. The outright forward rate is 1.2000. He buys a participating forward with a strike of 1.21, made up of a buying a EUR call and selling a EUR put. However, the EUR call has a notional of 15 mio (i.e., 5 mio more than the EUR put).
If the EUR rises to say 1.31 the client can buy 10 mio at 1.21 and also benefit from the gain made of 10 bp on 5 mio on the excess EUR Call. His average cost of buying EUR overall will therefore be lower.
Pricing a Ratio Par Forward with SuperDerivatives SDX:
A participating forward (ppf) can be entered automatically in the Single Option page.
Ratio Par Forward a.k.a Participating Forward
The Premium (Market Value) of an in the money USDCNY ratio par forward
A portfolio of USDCNY ratio par forward, stripped for 1 year duration
A Ratio Par Forward is an extremely popular structured product which many regional banks offering it to both their corporate clients as well as their retail clients.
Register for your trial account and try pricing this for yourself: https://www.superderivatives.com/registration.aspx
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