Question about Snowball, Target Redemption Forward
How does a target redemption forward work?
A target redemption forward is a foreign exchange product that allows the holder, usually a corporate, to buy or sell a currency at an enhanced rate for a number of expiry dates, with zero upfront premium. The product automatically expires if the enhanced rate reaches a target level.
How do you price a Tarf?
The Price of the TARF is the sum of the present values of cash flow of each leg, where the present value is the payoff discounted over the tenor to the inception date/ date of calculation using the domestic risk free rate, i.e. Payoff x EXP(-rdt).
What is a Tarf?
A target redemption forward (TARF) is a structured forward contract that allows you to trade at a better rate than a standard forward contract by integrating leverage and a profit cap level.
Can forward contracts be traded?
Forward contracts trade in the over-the-counter (OTC) market, meaning they do not trade on an exchange. When a forward contract expires, the transaction is settled in one of two ways. The first way is through a process known as “physical delivery.”
How do you hedge a Tarf?
The sequence of steps are:
- Simulate the underlying FX exchange rate using Monte Carlo simulation.
- Simulate the payoff for vanilla products including the simple forward, call and put options.
- Simulate the payoff for participating forward and TARF.
- Calculate average impact and worst case loss.
- Plot required graphs.
What is a Participating forward?
A participating forward is a conservative hedging instrument that offers complete protection against currency losses without requiring the payment of a premium. More specifically, it allows hedging at a pre-defined rate while, at the same time, you keep the opportunity to benefit partially from a favorable market move.
What is a tarn option?
A targeted accrual redemption note (TARN) is an index-linked derivative containing a target cap. The cap refers to the maximum amount of accumulated coupon payments received. Once the cap has been reached, the note automatically terminates. FX-TARNS are linked to an index of currencies rather than equities.
How do FX accumulators work?
A Leveraged FX OTC Accumulator with American Knock-Out is a derivative contract. It allows the client on each Fixing Date to accumulate in the Base Currency at a Strike Price which is more attractive than the prevailing market rate at inception of the trade.
Why forward contracts are risky?
There are several key disadvantages of a forward contract. For instance, their details are not made public as they are negotiated privately between the two parties involved and because they trade over-the-counter. As such, these derivatives aren’t regulated and come with a greater degree of risk.
What is the risk of forward contract?
Default Risks:
Forward contracts mainly serve a purpose for buyers and sellers to manage the volatility that is associated with commodities and other financial investments. They are riskier for both parties involved as they are over-the-counter investments.
Why forward contract is flexible?
In a flexible forward contract, the funds can be exchanged in one go (“outright”). Alternatively, several payments may be made over the course of the contract provided that the entire amount is settled by the maturity date.
How do FX accumulators work?
A Leveraged FX OTC Accumulator with American Knock-Out is a derivative contract. It allows the client on each Fixing Date to accumulate in the Base Currency at a Strike Price which is more attractive than the prevailing market rate at inception of the trade.