Structured FX Products: A Guide for Corporate Finance Teams

What are structured FX products and how do they work?

Structured FX products are complex financial instruments typically used by financial institutions and businesses with significant foreign exchange needs. They are classified as complex derivatives — financial contracts whose value is derived from underlying currency exchange rates. Unlike standard FX products such as spot trades, simple forwards, or plain-vanilla options, structured products combine multiple elements to create customised payoff profiles that cater to specific hedging objectives, risk appetites, and market views.

The building blocks of most structured FX products include forward contracts, vanilla call and put options, digital options, and barrier-based contracts (knock-in and knock-out features). By combining these elements in different ways, banks and specialist providers construct instruments that can, for example, offer a more favourable exchange rate than a standard forward — but only if certain market conditions are met during the life of the contract. If those conditions are not met, the outcome may be significantly worse than a simple hedge.

This is the fundamental trade-off in all structured FX products: the potential for improved economics under one set of market conditions is paid for by accepting worse economics under another set of conditions. There is no free lunch. Every apparent benefit in a structured product is financed by an offsetting risk, and understanding precisely where that risk sits is essential before entering into any structured transaction.

The majority of structured FX products work by monetising the uncertainty of future exchange rates. When a market participant holds a view about where a currency will or will not go, option markets allow the construction of financial contracts that turn those views into specific payoffs. Consider a simple illustration: if you firmly believed that EUR/USD would not rise above 1.20 in the next twelve months, another market participant might pay you a premium for a contract in which you would owe them a large sum if EUR/USD exceeds 1.20, but nothing if it stays below. By combining this type of contract with a regular forward, you could achieve a lower effective hedging rate — but you are now exposed to a potentially large loss if your view proves wrong.

Banks and FX providers sell "packaged" structured products to corporate clients. Behind the scenes, their trading desks replicate the payoff using combinations of basic FX options, covering their own market risk while locking in a profit margin. The client sees a single product with defined terms; the provider manages a portfolio of offsetting option positions. This packaging makes structured products accessible but can also obscure the true risks embedded within them.

Structured FX products are primarily used by more sophisticated finance teams — those with the expertise to evaluate the risk/reward trade-offs, the systems to monitor mark-to-market exposures, and the governance structures to ensure that hedging decisions remain within board-approved parameters. They are not suitable for all businesses, and their misuse has led to significant financial losses and litigation across the UK and internationally.

What are the main types of structured FX products?

Structured FX products can be grouped into three broad categories, each built from different combinations of the underlying building blocks.

Options-based structures

These combine vanilla options (standard calls and puts), digital options (which pay a fixed amount if a rate is above or below a certain level), and exotic options such as barrier options (where the contract activates or deactivates depending on whether the rate hits a specified level). The payoff profile depends on the specific combination of options used and the strike prices, barriers, and expiry dates chosen.

Forward-based structures

These modify a standard forward contract by embedding option-like features. The most common example is the participating forward, which combines a forward with a built-in option to allow partial participation in favourable rate movements. The option premium is embedded in the contractual forward rate rather than charged separately, making these structures appear "free" — though the cost is always present in the form of a less favourable contracted rate relative to a standard forward.

Combination structures

These are the most complex category, bringing together multiple derivatives to create products with highly specific payoff characteristics. Examples include dual-currency deposits (which combine a deposit with a currency option), target redemption forwards or TARFs (a series of forwards with automatic termination once a profit target is reached), and accumulators (which require the holder to buy or sell currency at regular intervals at a rate linked to market conditions). These products require the highest level of expertise to evaluate and manage.

What are the building blocks of structured FX products?

Before examining specific structured products, it is important to understand the individual components from which they are constructed. Think of these as Lego-like pieces that can be combined in countless ways to produce different risk and return profiles.

• Forward FX contracts: Agreements to buy or sell a specified amount of currency at a predetermined exchange rate on a specific future date. The rate is fixed at inception, providing certainty but no flexibility to benefit from favourable rate movements.
• Plain-vanilla FX options: The most basic form of currency option, giving the holder the right — but not the obligation — to buy (call option) or sell (put option) a currency at a predetermined strike price on or before a specified expiry date. The buyer pays a premium for this right.
• Digital options: Also known as binary options, these pay a fixed amount if the exchange rate is above (for a call) or below (for a put) a specified level at expiry, and nothing otherwise. There is no variable payoff — it is all or nothing.
• Knock-in and knock-out barriers: Conditions attached to a contract that cause a payoff feature to become active (knock-in) or inactive (knock-out) if the underlying exchange rate crosses a specified barrier level at any point during the contract's life. These are path-dependent features — they depend on what happens during the contract, not just the rate at expiry.
• Path-dependent structures: Options where the payoff depends on the path the exchange rate takes over time, rather than just its value at maturity. Examples include accumulators (where the amount of currency bought or sold depends on the rate at regular observation dates), TARFs (where the contract terminates once a cumulative profit target is reached), and lookback structures (where the payoff is based on the most favourable rate observed during the contract).

The combination of these building blocks — each with its own strike price, barrier level, notional amount, and expiry — is what creates the wide variety of structured products available in the market. The key principle is that each block carries its own risk and cost, and when they are combined, the risks and costs interact in ways that may not be immediately obvious.

What is a participating forward?

A participating forward is one of the most commonly offered structured FX products and is often the first structured instrument that corporate finance teams encounter. It is structured as an FX forward with a built-in option that allows the holder to benefit from a predefined percentage of any favourable currency movement while maintaining full protection against unfavourable movements.

The option premium is embedded in the contractual forward rate, which means there is no separate upfront payment. Instead, the contracted forward rate is less favourable than the standard forward rate available in the market — this difference is the implicit cost of the option.

The hedging amount and participation level are predefined at inception. For example, a 50% participating forward hedges 100% of the exposure against adverse currency movements while allowing the holder to benefit from 50% of any favourable movement. A 75% participating forward provides the same downside protection but allows benefit from 75% of the upside, at the cost of a less favourable contracted rate.

At maturity, the outcome depends on where the spot rate sits relative to the contracted forward rate:

• If the currency moves unfavourably: The company is fully protected by the forward portion. The entire exposure is converted at the contracted forward rate, regardless of how far the spot rate has moved. The downside is limited irrespective of the participation level, because the company holds an option.
• If the currency moves favourably: The company benefits on the participation portion at the prevailing spot rate, while the remainder is converted at the contracted forward rate. The blended rate achieved is better than the contracted forward rate but not as good as the spot rate.

What is a dual-currency deposit?

A dual-currency deposit (DCD) is a structured product that enhances the yield on a currency deposit by monetising the premium from a currency option that the investor implicitly sells to the bank. It involves two currencies: the investor deposits funds in a base currency and receives a higher interest rate than would be available on a standard deposit. In exchange, the bank has the right to repay the deposit in a different (alternate) currency at a pre-set exchange rate.

The enhanced interest rate compensates the investor for the risk that they may receive their principal back in a currency that has depreciated relative to their base currency. In economic terms, the investor is selling a currency option to the bank and receiving the option premium in the form of a higher deposit rate.

At maturity:

• If the exchange rate is favourable to the investor: The deposit plus interest is repaid in the base currency. The investor earns the enhanced yield and keeps their principal in the original currency.
• If the exchange rate is unfavourable: The bank exercises its option and repays the deposit (plus interest) in the alternate currency at the pre-set rate. The investor receives the alternate currency at a rate that is worse than the prevailing market rate, and may suffer a loss when converting back to the base currency.

Dual-currency deposits are used by businesses that hold surplus cash in multiple currencies and have a genuine commercial need for either currency. They are less suitable for businesses that have no use for the alternate currency, as the enhanced yield may not compensate for the currency conversion risk.

What are FX accumulators and decumulators?

FX accumulators (and their mirror image, decumulators) are structured products that allow a business to buy or sell foreign currency at a strike price that is more favourable than the prevailing market rate. In exchange, the business commits to transacting a predetermined amount of currency at each observation date during the accumulation period — typically daily, weekly, or monthly.

The operation is straightforward in principle: at each observation date, the spot rate is compared against the strike price. If the spot rate is less favourable than the strike, the business transacts at the more advantageous strike price. If the spot rate is more favourable, the transaction may still occur at the strike (depending on the specific structure) or the observation may be skipped.

There are many variations on the basic accumulator structure. Some include notional multipliers, where the amount transacted doubles or triples if the spot rate moves beyond a certain level — dramatically increasing the business's exposure precisely when the market is moving against them. Others include range features, where the transaction only occurs if the spot rate is within a defined range. Most accumulators include a knock-out level: if the spot rate moves past this level in the business's favour, the contract terminates automatically, capping the potential benefit.

The asymmetry of accumulators is their defining risk: the potential benefit is capped (by the knock-out), but the potential cost can be very large (particularly with notional multipliers). This makes accumulators economically similar to selling options, and they have been the source of significant corporate losses globally, particularly during periods of sharp currency volatility.

What is a target redemption forward (TARF)?

A target redemption forward (TARF) offers an improved exchange rate compared to a standard forward contract, but with conditions and potential risks that make it a fundamentally different instrument. Because of the asymmetry in its payoff structure, a TARF is economically akin to selling an option — the business takes on risk in exchange for a more favourable rate.

The basic structure consists of a series of forward contracts at a predefined rate (the "TARF rate") on multiple future settlement dates — typically monthly or quarterly over a one- to two-year period. At each settlement date, the TARF rate is compared with the prevailing spot rate, and a gain or loss is calculated.

The distinguishing feature is the target redemption mechanism: the contract sets a cumulative "profit target" for the holder. Once the total gains accumulated across all settlement dates reach this target, the TARF terminates automatically. This means the upside is capped. However, if the currency moves unfavourably, the business continues to be obligated to transact at the TARF rate on every remaining settlement date — the downside is not capped.

Some TARFs also include a knock-out level that cancels the contract if the spot rate moves past a certain threshold, and some include notional multipliers that increase the amount transacted on unfavourable settlement dates. These additional features further complicate the risk profile and make accurate scenario analysis essential.

TARFs have been widely sold to corporate clients, but their complexity and asymmetric risk have contributed to significant losses. A business that enters a TARF expecting a modest improvement on its forward rate can find itself locked into large, unfavourable transactions for the remaining life of the contract if the currency moves sharply in the wrong direction.

What are knock-in and knock-out structures?

Knock-in and knock-out features are conditions added to forward contracts or options that make the protection contingent on the exchange rate reaching (or not reaching) specified barrier levels during the life of the contract. They are used to reduce hedging costs by accepting a degree of conditionality — the contracted rate is usually more favourable than a standard forward, but the protection can be gained or lost depending on market movements.

Knock-in forwards

A knock-in forward has features that become active only if the exchange rate hits a pre-specified barrier level at any point during the contract. Until the barrier is triggered, the contract may have no hedging effect. Once the knock-in level is reached, the contract functions as a standard forward. The risk is that the barrier is never hit and the business is left unhedged, despite having entered into a contract.

Knock-out forwards

A knock-out forward is active from inception and functions as a normal forward contract — until the exchange rate hits a specified knock-out barrier. If the barrier is reached, the contract is voided and the business loses its hedge. The contracted rate on a knock-out forward is typically better than a standard forward (reflecting the risk that the hedge may disappear), but the business is exposed to the full market rate if knock-out occurs.

Both types introduce contingency risk: the possibility that you believe you are hedged but the protection is either not yet active or has been extinguished. For businesses that rely on hedging to protect budgeted margins, this contingency can be particularly dangerous because the hedge may fail precisely when market conditions are most volatile and protection is most needed.

What can we learn from real-world cases?

The difference between well-managed and poorly managed use of structured FX products is starkly illustrated by real-world corporate experience. Two cases — one of disciplined, sophisticated use and one of catastrophic mis-selling — demonstrate the spectrum.

Case study: Safran — a sophisticated structured hedging programme

Safran, one of France's largest aerospace and defence companies, manages an average annual foreign exchange exposure of approximately $9 billion. The company's revenues are heavily denominated in US dollars, while its cost base is primarily in euros. This structural mismatch creates a substantial and ongoing need to hedge USD revenues back into EUR.

Safran hedges long-term sales for maturities extending up to four years. A basic approach using standard FX forwards to purchase euros proved too costly: with EUR/USD spot at 1.13 in 2018, three-year forward rates were approximately 1.25 due to the interest rate differential between the euro and the dollar. This forward discount would have significantly eroded the company's reported margins.

Instead, Safran uses structured products — including leveraged options — that can achieve effective USD hedging rates of 1.12 or below, with limited and well-defined risk parameters. This approach is managed by an experienced treasury team operating under a strict hedging policy that is reviewed and approved by the Board of Directors and the Audit Committee. The company maintains regular reporting including mark-to-market impacts, net USD exposure levels, and hedge rate targets across the four-year hedging horizon.

Key lesson: Structured products can deliver genuine economic value for large, sophisticated organisations — but this requires experienced personnel, rigorous governance, board-level oversight, transparent reporting, and a clear understanding of the risk/reward trade-offs at every level of the organisation.

Case study: UK garment importer — structured product mis-selling

A UK-based garment importer brought legal proceedings against its FX broker following the post-Brexit sterling volatility of 2016-2017. The company, which initially sought straightforward hedging for its euro and dollar payables, was recommended increasingly complex structured FX transactions by its broker over a period of months.

What began as simple hedging evolved into transactions that the company alleged were speculative bets on currency movements — far beyond the scope of a garment importer's legitimate hedging needs. When sterling fell sharply following the Brexit referendum, the structured products generated losses of approximately £3 million, effectively halving the company's operating profit for 2017 and contributing to the demise of a subsidiary.

The company argued that it had wanted simply to hedge its currency exposure but that the broker had recommended transactions of increasing complexity without adequately explaining the risks. The FX broker subsequently exited the FX options business entirely. Legal commentary at the time noted that similar claims across the UK market were worth hundreds of millions of pounds.

Key lesson: Structured products can cause catastrophic damage when sold to businesses that lack the expertise to evaluate them, when the products go beyond the business's legitimate hedging needs, or when the provider fails to ensure the products are suitable for the client. The transition from "hedging" to "speculation" can be gradual and may not be apparent to a non-specialist finance team until losses materialise.

When should a business consider using structured FX products?

Structured FX products occupy a specific position in the hierarchy of currency risk management tools. They sit above standard forwards and plain-vanilla options in terms of complexity, risk, and the expertise required to manage them. A business should only consider structured products when it has already established a solid foundation of simpler hedging practices and has the governance framework to support more complex instruments.

There are circumstances where structured products can add genuine value:

• When standard forward rates are unfavourable due to interest rate differentials: As the Safran case illustrates, forward discounts on long-dated contracts can be so large that they erode margins significantly. Structured products can partially offset this cost — but only for businesses with the expertise to manage the embedded risks.
• When the business has a strong, well-informed view of a currency's likely range: If the finance team — based on fundamental analysis rather than speculation — believes a currency is unlikely to breach certain levels, structured products can monetise that view to achieve more favourable hedging rates.
• When the business has hedging volumes large enough to justify the complexity: The fixed costs of evaluating, executing, monitoring, and governing structured products mean they are generally only economical for businesses with substantial FX exposures.

Conversely, structured products are not suitable when:

• The finance team does not have specialist FX knowledge or the time to monitor positions actively
• There is no board-approved hedging policy or governance framework in place
• The business cannot afford to absorb worst-case scenario losses
• The provider is recommending structures that go beyond the business's identifiable hedging needs
• The business is being told that a structured product is "free" or "risk-free" — neither is ever true

What are the risks of structured FX products?

The risks associated with structured FX products are materially different from those of standard hedging instruments. Understanding these risks is a prerequisite for any business considering their use.

Payoff asymmetry

Many structured products — particularly TARFs, accumulators, and structures with notional multipliers — have asymmetric payoff profiles. The potential gain is capped while the potential loss is uncapped or significantly larger than the gain. This asymmetry means that the product may perform well under normal market conditions but generate outsized losses during periods of volatility or sharp directional moves.

Complexity and opacity

The interaction between multiple options, barriers, and conditions within a single structured product can make it extremely difficult to understand the full range of possible outcomes. Mark-to-market valuations can swing sharply, and the relationship between the spot rate and the product's value is often non-linear. Even experienced treasury teams can struggle to fully model the risk of complex structures.

Liquidity and exit costs

Structured products are typically bespoke and traded over the counter (OTC), meaning there is no liquid secondary market. If a business needs to unwind a structured position before maturity — due to a change in commercial circumstances or an unexpected market move — the cost of exiting can be very high. The provider is often the only counterparty willing to buy back the position, giving the business limited negotiating power.

Counterparty concentration

Structured products tie the business into a relationship with a single provider for the life of the contract. If the provider experiences financial difficulty, the business's hedges may be at risk. Equally, the provider has significant information and pricing power in the relationship, particularly when it comes to valuations and restructuring requests.

Suitability and mis-selling risk

The FCA requires firms that sell complex derivatives to ensure they are suitable for the client. However, the history of structured FX product sales to UK corporates includes numerous instances where products were sold to businesses that did not fully understand the risks. The boundary between hedging and speculation can become blurred, particularly when a provider stands to earn higher margins from more complex products.

How should a company manage structured FX products?

If a business determines that structured FX products are appropriate for its circumstances, the following governance and management framework is essential. These are not optional best practices — they are minimum requirements for responsible use of complex derivatives.

1. Establish a hedging policy and procedures

A written, board-approved hedging policy should define which instruments are permitted, the maximum notional amounts and tenors allowed, the currencies that can be hedged, and the circumstances under which structured products (as opposed to simpler instruments) may be used. The policy should clearly distinguish between hedging and speculation and prohibit the latter.

2. Implement internal controls and governance structures

No single individual should have the authority to execute structured FX transactions without oversight. Segregation of duties, approval thresholds, and dual-signature requirements are essential safeguards. The finance team should maintain an up-to-date register of all outstanding structured positions, including notional amounts, maturity dates, barrier levels, and current mark-to-market values.

3. Maintain regular oversight and reporting

The Board of Directors — or a designated committee such as the Audit Committee or Risk Committee — should receive regular reports on the company's FX hedging positions, including the mark-to-market value of all structured products, the net foreign currency exposure, and the potential impact of defined stress scenarios. Directors must be aware of the hedging decisions being made and the risks the company is carrying.

4. Conduct scenario analysis

Before entering into any large structured FX transaction, the finance team should request comprehensive scenario analysis from the financial service provider. This should show the payoff under a range of exchange rate outcomes — not just the expected case, but extreme scenarios including the worst case. If the provider is unwilling or unable to provide clear scenario analysis, that should be treated as a warning sign.

5. Ensure contracts are managed by qualified personnel

Structured FX products should only be managed by individuals who understand the cost/benefit analysis of each instrument, can interpret mark-to-market valuations, and are capable of identifying when a position's risk profile has changed materially. If the business does not have this expertise in-house, it should engage independent advisory support rather than relying solely on the product provider — who has an inherent conflict of interest as both advisor and counterparty.

A final caution: structured FX products have a legitimate role in corporate risk management for businesses with the scale, expertise, and governance to use them responsibly. But for the majority of UK SMEs, standard forwards and plain-vanilla options provide all the hedging capability needed without the complexity, opacity, and asymmetric risk that structured products introduce. The starting point should always be the simplest instrument that meets the hedging objective — and structured products should only be considered when simpler alternatives have been evaluated and found insufficient.