Cap Loss Forward

Also known as Limit Loss Forward

The Cap Loss Forward combines an OTM option with a synthetic forward. The strategy enables the client to gain the protection of a forward position, whilst at the same time limiting the maximum negative mark-to-market (loss) that would otherwise arise were the forward to settle OTM.

The strategy is typically offered as a zero cost solution where the cost of the OTM option is funded by adjusting the synthetic forward rate.

Payoff Diagram:

Payoff at Expiry:

At expiry if EURUSD fixes:

• Above the Strike, the client is fully protected at the Strike on 100% of the Notional.

• Below the Strike but above the OTM Call Strike, the client will find itself obligated to trade at the Strike level on 100% of the Notional.

• Below the OTM Call Strike, the client rate will improve by 1pip for every pip that EURUSD fixes below the Call Strike.

  • Payoff = Min(Strike -(OTM Call Strike - Spot),Strike)