Can you explain what are some similarities and differences between snowball, KIKO (knock in knock out) and TRF (target redemption forward) derivatives?


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    $\begingroup$ Can you define the two acronyms? Am I correct that by snowball, you mean "debt snowball"? $\endgroup$ – JoeTaxpayer Aug 17 '17 at 3:27
  • $\begingroup$ KIKOs and TARFs are structured option contracts whereas snowballs amd inverse snowballs are debt instruments. Asking for differences is already far stretched (seeing as they're different asset classes), asking for similarities makes no sense at all, in my eyes. $\endgroup$ – hroptatyr Aug 17 '17 at 13:25
  • $\begingroup$ @hroptatyr - wow. Thanks for the education. $\endgroup$ – JoeTaxpayer Aug 17 '17 at 14:25
  • $\begingroup$ @JoeTaxpayer I've voted off-topic, this needs to go to quant.SE; I seriously doubt private investors have access to anything but the most trivial structured strategies (calendar spreads, call/put, straddles, etc.) $\endgroup$ – hroptatyr Aug 17 '17 at 14:35

Similarities: 1. Snowball, kiko, trf all belong to a family of derivative products with limited profitability and unlimited risk. 2. They all have periodic settlement (monthly USD sale, e.g.) 3. If you evaluate just the first few payments, NPV is negative, i.e. a loss, for the product provider(i.e. bank). However, if you evaluate the remaining payments, the NPV is positive. Their upfront profit is financed by taking risk in the back-end.

Differences: The main difference is in Early Termination Provision. For TRF, even if the original contract is for 2 years, if the life-to-date fx gain of the TRF is above a certain barrier, the contract terminates and all settlements afterward are automatically cancelled. For KIKO, if the exchange rate falls below a preset barrier level at any time during the life of the contract, the current settlement as well as all settlements afterward are automatically cancelled. For Snowball, there is no early termination, but, whereas TRF, KIKO both have fixed contract exchange rate, Snowball has a variable contract exchange rate that can reset against client's benefit. This mechanism generates enough value to give the client upfront benefit.

  • $\begingroup$ Have you got a (traded) example of a TARF with a periodic settlement? I think you're mixing up terms here. $\endgroup$ – hroptatyr Aug 17 '17 at 13:28
  • $\begingroup$ @hroptatyr I'm pretty sure that Tarfs settle each accrual period at the end of the period, I'll check some term sheets in a bit though. If they don't, then perhaps TARNs do (basically the same but structured as notes). $\endgroup$ – will Sep 18 '17 at 7:01

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