How do you price/hedge a flexible forward,say one where you can sell total 100 EUR to USD over three next annual payment dates, at a strike of 1.4.You have the flexibility to convert whenever you like, though total has to be 100 EUR, and hence strike is a bit higher than market forward rate.thanks

Hello everyone,I try to solve the same puzzle regarding flexible forwards. I have an instrument (say an FX-Forward) which can be exercised at any time before maturity (aka Callable Forward) . Therefore, it can be thought of as an american type forward agreement: trader is free to exercise at any time before maturity, however obligated to make the transaction (at latest) at maturity. Well, according to this description I made a literature review on how to price such instruments. Unfortunately, there is no exact match. I am not sure, but for the put case where spot<strike, I guess Longstaff-Schwartz simulation algorithm can be used for valuation (although it is very time consuming). The call case (where spot>strike) is a little bit tricky and I think one can simply value a forward contract under the assumption that it is not optimal to exercise an american call before maturity or simply use american call approximation (Bjerksund-Stensland). However, I am afraid that in both cases something is missing, because the instrument has both forward and option features. One approach would be to use a portfolio composed of a forward contract and an american option, but I am not really sure about the combination, given the underlying strategy (call/put). Any help will be appreciated. Thanks a lot in advance!

Key of question lies on the model factors. LS on forward would work but one needs to incorporate stochastic dom/for rates.Rgs

This question has been asked several times in these forums. It is an unsolved problem from a theoretical modeling point of view, make a breakthrough and you would improve your lifetime earnings potential. Most dealers simply price and hedge them to the worst-of date facing the client.