RT Journal Article
SR Electronic
T1 Pricing TARNs Using a Finite Difference Method
JF The Journal of Derivatives
FD Institutional Investor Journals
SP 62
OP 72
DO 10.3905/jod.2015.23.1.062
VO 23
IS 1
A1 Xiaolin Luo
A1 Pavel V. Shevchenko
YR 2015
UL https://pm-research.com/content/23/1/62.abstract
AB 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