TY - JOUR T1 - Pricing TARNs Using a Finite Difference Method JF - The Journal of Derivatives SP - 62 LP - 72 DO - 10.3905/jod.2015.23.1.062 VL - 23 IS - 1 AU - Xiaolin Luo AU - Pavel V. Shevchenko Y1 - 2015/08/31 UR - https://pm-research.com/content/23/1/62.abstract N2 - 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 ER -