@article {Luo62, author = {Xiaolin Luo and Pavel V. Shevchenko}, title = {Pricing TARNs Using a Finite Difference Method}, volume = {23}, number = {1}, pages = {62--72}, year = {2015}, doi = {10.3905/jod.2015.23.1.062}, publisher = {Institutional Investor Journals Umbrella}, abstract = {Target accumulation redemption notes (TARNs) are a popular product with Asian foreign exchange investors. They have a number of variations, but their main feature is that option-like payoffs occur on a set of future dates, depending on whether the underlying exchange rate is above or below a specified strike level. The total payout is capped and the contract expires when the cap is reached. The standard valuation technique for this path-dependent payoff is Monte Carlo simulation. In this article, Luo and Shevchenko develop an efficient finite-difference approximation that accommodates path dependence and even non-diffusive jumps in the exchange rate. In a comparison simulation against Monte Carlo, the new technique achieves much better accuracy in less execution time.TOPICS: Derivatives, simulations, emerging}, issn = {1074-1240}, URL = {https://jod.pm-research.com/content/23/1/62}, eprint = {https://jod.pm-research.com/content/23/1/62.full.pdf}, journal = {The Journal of Derivatives} }