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How FX TARN Coupons Link Currency Moves to Note Maturity

Article Quant Q&A · Author: KK Fong
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Summary

An FX Targeted Accrual Redemption Note (FX TARN) is a structured note whose coupon depends on one or more exchange rates. The example links a coupon to the change in a yen–US dollar rate and ends the note once accumulated coupons reach a target; if the target is not reached, the note matures at a stated final date.

The key risk is that an adverse currency move can reduce coupons and delay redemption. An investor may therefore remain exposed to a low-paying bond for longer than expected. The document illustrates this exposure with a hypothetical formula and target, but provides no pricing method, valuation, or empirical results. Actual terms vary by contract, and the example alone does not establish the probability or size of losses.

Key ideas

  • FX TARN coupons can be determined by exchange-rate formulas.
  • Redemption may occur when accumulated coupons meet a target.
  • If coupons remain low, the note can extend to its final maturity.
  • An adverse currency move can reduce income while extending exposure to the note.

Tags

ForexFixed incomeDerivatives pricingRisk management
Full text
# Risk of FX Targeted Accrual Redemption Note


# Risk of FX Targeted Accrual Redemption Note












What is the risk of investing in FX Targeted Accrual Redemption Note (FX-TARN) ?

## Answer by dm63 (score 2)

https://quant.stackexchange.com/a/40359

An FX Tarn is a structured note whose coupons are calculated from a formula involving one or more fx rates, and whose maturity depends on the cumulative coupons received. For example , the coupon could be $4pct*(1-FX_0/FX_1)$ where $FX_0$ is the Yen/Usd at issuance and $FX_1$ is the Yen/Usd on a coupon date. The bond matures when the cumulative coupons received reaches 10%, say. If this never happens the bond matures after 10 years.

Thus, the risk in this case is that the dollar weakens, causing the coupons to be reduced , and the maturity extends. Thus, you own a low paying bond for 10years.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.