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

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    $\begingroup$ You will need to add more details about your product: can you explain how the payoff mechanism works? $\endgroup$ – Daneel Olivaw Jun 26 '17 at 8:42
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    $\begingroup$ The length of time before redemption is uncertain (unlike most fixed income securities, which have a predefined term). Generally you want it to be reedemed quickly, which happens if the referenced interest rate stays where it is or goes lower. But if the rate rises you will be "stuck" in the investment for a long time and your overall return will not be good. That is the risk: a rise in the referenced rate, which will lock up your money for longer than you expected, at a below average return. $\endgroup$ – noob2 Jun 26 '17 at 18:30

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.


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