Outright

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1.

In relation to derivative financial instruments, an outright is one which commits both parties to the contracted exchange at maturity.

Examples include forward foreign exchange contracts, and forward rate agreements.


Outright instruments are contrasted with options.

Under an option, one of the parties has a choice about whether to make the exchange at maturity, and will only do so if it is in their interests to do so at the time, based on prevailing market prices.


2.

The term 'outright' is also used to refer to simpler financial instruments, which can also be constructed synthetically, from a combination of other instruments.


Example

A two-year zero coupon deposit can be described as an outright instrument to produce a single cash flow at the end of two years.

These cash flows can also be constructed as a synthetic deposit, as a combination of a one year zero coupon deposit, linked with a forward contract to reinvest the maturity proceeds at Time 1 year for a further year at a pre-agreed rate.

This synthetic two-year deposit has the identical cash flow pattern to the outright two-year deposit.


3.

An outright transaction is a simple sale and purchase.


See also