I’m trying to find what exactly the FX “target redemption forward contracts” are, as the term was mentioned in Citic Pacific’s (267) profit warning back in late October. After googling the term, I couldn’t find much info. But according to the profit warning, they should not be too different from the accumulator structure that I talked about previously (http://www.hkfinancialnews.com/?p=89). If any reader knows what exactly this is or has a sample termsheet, please send it to me.
Instead, I’ve found a lot of entries on TARN (Target Redemption Notes), which is a totally different beast. TARN is another structured product, but then its downside is protected as it’s principal protected. It also provides a guarantee of a certain amount of coupon over a period of time (hence the name target redemption). For example, if the target is 20% and the tenor of the note is 6 years, the note guarantees that the note holder will have gotten accumulative coupons of 20% of the principal value by the end of the sixth year. It also has a knock out feature where once the target coupon amount has reached, the note will be redeemed immediately at 100%. In the example, if the noteholder receives 8% in the first year, 9% in the second year, and the theoretical coupon rate in third year is 5%, then the noteholder will only receive a 3% coupon since the max coupon allowed is 20%. The amount of coupon is usually linked to the performance of a currency pair or a stock above or below a given strike on a series of fixing dates.
If Citic Pacific bought this type of TARNs instead of the FX accumulators, they would have suffered a much smaller loss!
