Pricing Reciprocal Average Rate Forward

A reciprocal average rate forward is a forward contract whose matured payoff is the difference between the reciprocal of the arithmetic average of foreign exchange rates and the reciprocal of a strike. The average is calculated by those rates quoted with the market convention over a given set of observation dates. The forward strike is also quoted in the same convention. Clearly, a reciprocal average rate forward is a nonlinear forward contract, which means the contract matured payoff is a non-linear function of averaged rates.