Target Redemption Forward

Target Redemption Forward Strategy

A Target Redemption Forward note is a strategy that consists of a series of two options struck at the same Strike Price - a Target Redemption option coupled with a vanilla, one of which you buy and one of which you sell. Each pair of options expires together on a preset date.

It would be checked on each predefined Fixing Date. Once the redemption condition has been met; the whole structure ceases to exist. The Target Redemption Forward strategy lets the buyer to Sell USD against JPY at a rate which is favourable as compared to the current prevailing rate, as long This structure consists of the following strip of options, whereby each pair in the strip expires Monthly until Wed, 26 Aug 2012: 1. Customer is Buying a series of USD Put/JPY Call, Notional amount of 1,000,000 USD with a strike of 100.00 with a Redemption target set at 5,000,000 JPY. 2. Customer is Selling a series of vanilla USD Call/JPY Put with a strike of 100.00 for 1,000,000 USD each.

Target Redemption Forward Pricing Parameters

Spot: 94.300 Maturity Date: Each pair of options expires separately on a Monthly basis Notional for each set of options: Bought options: USD 1,000,000 Sold options: USD 1,000,000 Redemption Target: 5,000,000 JPY

Target Redemption Forward Advantages

Can be built as a Zero Cost structure. The structure enables the buyer of TARN to hedge at rate significantly favourable to the prevailing market rate at a zero cost. Can protect a cash flow by setting payment dates and required amounts.

Target Redemption Forward Risk

If the Redemption target has been met the Buyer if the TARN could be left un-hedged. The loss on the Vanilla options sold could be unlimited.

Possible Results at Expiry

Buyer of the TARN option will have the right to Sell USD 1,000,000 against JPY at 100.00 if the market fixes below 100.00. The actual redemption amount would be recorded. 2. On each expiry date if the spot settles above 100.00 the Buyer of TARN option will be Selling USD 1,000,000 at 100.00. 3. Once the redemption target has been met the structure would cease to exist.

Structure

Premium: -975,219 / -57,270 Bought options: USD 1,000,000 Sold options: USD 1,000,000 Redemption Target: 5,000,000 JPY

Summary

The Target Redemption Forward structure lets the TARN buyer hedge against any USD/JPY market fluctuation until the Redemption Target is met. The buyer of the TARN is also selling Vanilla options that could be exercised if in the money. Once the target is met the structure ceases to exist and the buyer has to hedge at prevailing market rates.