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Title: Target redemption notes
Authors: Kwok, Yue Kuen
Chu, Chi Chiu
Keywords: Target redemption note
Pricing behaviors
Financial instruments
Mathematical models
Issue Date: Jun-2007
Citation: Journal of futures markets vol. 27, issue 6, June 2007, p. 535-554
Abstract: The target redemption note is an index-linked note that provides a guaranteed sum of coupons (target cap) with the possibility of early termination. In a typical structure, the coupons are calculated based on an inverse floating, London Interbank Offered Rate/Euro Interbank Offered Rate (LIBOR/Euribor) formula. Once the accumulated amount of coupons has reached the prespecified target cap, the note will be terminated with final payment of the par. The knock-out criterion depends on a path-dependent state variable defined by the running accumulated coupon sum. In some simplified cases, we manage to obtain a closed form valuation formula for the note value. We propose several numerical schemes for pricing the note under the one-factor and two-factor short rate models. Pricing behaviors of the target redemption note are also explored.
Rights: This is a preprint article published in Journal of Futures Markets 27:6, June 2007, P. 535-554 © copyright (2007) (John Wiley & Sons). The original journal article is posted on the journal's web site at
Appears in Collections:MATH Journal/Magazine Articles

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