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| A ''dual currency note'' (DC) pays coupons in the investor's domestic currency with the notional in the issuer’s domestic currency. A ''reverse dual currency note'' (RDC) is a note which pays a foreign interest rate in the investor's domestic currency. A ''power reverse dual currency note'' (PRDC Note) or ''power reverse dual currency bond'' (PRDC Bond) is an exotic financial [[structured product]] where an investor is seeking a better return and a borrower a lower rate by taking advantage of the [[interest rate]] differential between two economies. The power component of the name denotes higher initial coupons and the fact that coupons rises as the domestic/foreign exchange rate depreciates. The power feature comes with a higher risk for the investor, which characterizes the product as leveraged [[carry trade]]. Cash flows may have a digital cap feature where the rate gets locked once it reaches a certain threshold. Other add-on features include barriers such as knockouts and cancel provision for the issuer. PRDCs are part of the wider Structured Notes Market.<ref name="Structured">{{cite web|url=http://giddy.org/sf/articles/structured_notes.pdf|title=Structured Notes Market}}</ref>
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| == Market ==
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| The majority of investors are Japanese with 9 billion USD worth of notes issued in 2003 and the issued notional increasing every year thereafter up until 2008 when it sharply declined. Major participants in the market include issuers (usually [[International financial institutions|Supranationals]]) of the notes under their [[Medium Term Note|Euro Medium Term Note]] program. Also heavily involved are PRDC swap hedgers - the major ones include [[Nomura Securities Co.]], [[Daiwa Securities Capital Markets]], [[Mitsubishi UFJ Securities]], [[Mizuho Securities]], [[Deutsche Bank]], [[UBS Investment Bank]], [[JPMorgan Chase]], [[Goldman Sachs]], [[Citigroup]], [[Barclays Investment Bank]], [[Credit Suisse]], [[BNP Paribas CIB]], [[Bank of America Merrill Lynch]] and [[Royal Bank of Scotland]].
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| == Payoff and cashflows ==
| | If you present photography effectively, it helps you look much more properly at the globe around you. Offshore expert Word - Press developers high level of interactivity, accessibility, functionality and usability of our website can add custom online to using. Should you go with simple HTML or use a platform like Wordpress. If you have any questions relating to where and how to make use of [http://GET7.pw/wordpress_dropbox_backup_615803 wordpress backup plugin], you could call us at the site. In the recent years, there has been a notable rise in the number of companies hiring Indian Word - Press developers. The number of options offered here is overwhelming, but once I took the time to begin to review the video training, I was amazed at how easy it was to create a squeeze page and a membership site. <br><br>As you know today Word - Press has turn out to be a tremendously popular open source publishing and blogging display place. You may either choose to link only to the top-level category pages or the ones that contain information about your products and services. You are able to set them within your theme options and so they aid the search engine to get a suitable title and description for the pages that get indexed by Google. Furthermore, with the launch of Windows 7 Phone is the smart phone market nascent App. Once you've installed the program you can quickly begin by adding content and editing it with features such as bullet pointing, text alignment and effects without having to do all the coding yourself. <br><br>Usually, Wordpress owners selling the ad space on monthly basis and this means a residual income source. Browse through the popular Wordpress theme clubs like the Elegant Themes, Studio Press, Woo - Themes, Rocket Theme, Simple Themes and many more. You've got invested a great cope of time developing and producing up the topic substance. In crux the developer must have a detailed knowledge not only about the marketing tool but also about the ways in which it can be applied profitably. If you've hosted your Word - Press website on a shared hosting server then it'll be easier for you to confirm the restricted access to your site files. <br><br>Additionally Word - Press add a default theme named Twenty Fourteen. The SEOPressor Word - Press SEO Plugin works by analysing each page and post against your chosen keyword (or keyword phrase) and giving a score, with instructions on how to improve it. Exacting subjects in reality must be accumulated in head ahead of planning on your high quality theme. Giant business organizations can bank on enterprise solutions to incorporate latest web technologies such as content management system etc, yet some are looking for economical solutions. Digital digital cameras now function gray-scale configurations which allow expert photographers to catch images only in black and white. <br><br>There is no denying that Magento is an ideal platform for building ecommerce websites, as it comes with an astounding number of options that can help your online business do extremely well. Mahatma Gandhi is known as one of the most prominent personalities and symbols of peace, non-violence and freedom. As a result, it is really crucial to just take aid of some experience when searching for superior quality totally free Word - Press themes, Word - Press Premium Themes for your web site. If this is not possible you still have the choice of the default theme that is Word - Press 3. I have never seen a plugin with such a massive array of features, this does everything that platinum SEO and All In One SEO, also throws in the functionality found within SEO Smart Links and a number of other plugins it is essentially the swiss army knife of Word - Press plugins. |
| The investor pays a coupon times a fixed rate in currency c1 and receives a coupon times a fixed rate in currency c2 times current FX rate divided by the FX rate at the inception of the deal. However, the cash flows are always guaranteed to be positive for the investor. The investor, therefore, has the option to receive cash flows making the payoff similar to a Bermudan style FX option. The swap house is, thus, selling a series of [[Currency option]]s with a floating rate as a premium; the rate is usually subtracted with a spread.
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| [[Image:Derivatives PRDC.png]]
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| <math> \sum_{t=1}^{n} MAX(N \frac {FX_t} {FX_0} r_{1t} - r_{2t}(N-1),0) </math>
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| where
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| :: <math> N = \text {notional} </math>
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| :: <math> t = \text {time of a cash flow} </math>
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| :: <math> 0 = \text {time at the start of the deal} </math>
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| :: <math> r_1 = \text {fixed rate at t of currency1. A set of rates for every t are fixed at time 0. } </math>
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| :: <math> r_2 = \text {fixed rate at t of currency2. A set of rates for every t are fixed at time 0. } </math>
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| :: <math> FX = \text {exchange rate between currency1 and currency2} </math>
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| == Model ==
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| The pricing of PRDCs used to be done using 3-factor [[Lattice model (finance)|grid/lattice]] or [[Monte Carlo]] models where one factor represents the short rate in currency1; the second factor the short rate in currency2; and the third factor the movement in the FX rate between currency1 and currency2.
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| [[Short rate model|Model choice]] for the interest rate factors varies - for speed reasons, popular choices are [[Hull-White model]], [[Black-Karasinski model]], and extended Cheyette model.
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| FX model choice also varies among houses - popular choices are [[Bruno Dupire|Dupire]]-type [[local volatility]] models, stochastic [[SABR Volatility Model]]s, or models which allow mixing of the two.
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| Nowadays, most dealers use a variant of the industry-standard [[LIBOR market model]] to price the PRDCs.
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| === Inputs ===
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| * Correlation constants between each factor. Those correlation parameters are usually estimated historically or calibrated to market prices
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| * FX [[Volatility (finance)|volatility]] calibrated to FX Options and user inputs
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| * IRS volatilities of each currency calibrated based on IRS Swaptions and yield curves
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| * [[Yield curve]] of [[money market]] rate1 and rate2 based on deposit rates, [[Futures contract|futures]] prices and [[swap rate]]s
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| * Basis swap spread curves
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| * Spot FX rate
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| == Computation ==
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| Plain vanilla PRDCs can be broken down into a string of vanilla options.
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| For Callable PRDCs, which are not replicable, the [[present value]] and the risks are now computed using quasi-Monte Carlo simulations and can take several hours. The same can be said of the TARN PRDCs and Chooser PRDCs (which are also callable).
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| == Hedging ==
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| A plain vanilla PRDC is exposed to the movements in interest rates, FX, volatility (on both interest rates and fx), [[correlation]] and basis. Those risks are hedged with [[interest rate swap]]s in each currency to reduce [[interest rate risk]], interest rate [[swaption]]s in each currency to reduce interest rate volatility exposures, FX [[Option (finance)|Option]]s to reduce FX volatility exposures and [[Basis swap]]s to reduce [[basis risk]]. Correlation exposure can be partially hedged with correlation swaps.
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| While such hedges are theoretically possible, there are a lot of practical difficulties, largely due to the following situation. The owners of the PRDC notes, usually retail investors, don't hedge their risks in the market. Only the banks, which are all short the notes, actively hedge and rebalance their positions. In other words, if there is a significant move in FX, for example, all the PRDC books will need the same kind of FX volatility rebalancing at the same time. The note holders would be the natural counterparty for the hedge, but they don't take part in this market (similar to buyers of [[portfolio insurance]] in 1987). This situation often creates "one way markets" and sometimes liquidity squeeze situations in long term FX volatilities, basis swaps or long end AUD interest rate swaps.
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| The volume of PRDC notes issued has been so large that the hedging and rebalancing requirements far exceed the available liquidity in several key markets. However every model is derived under the assumption that there is sufficient liquidity - in other words, they are potentially mispricing the trades because in this market, a few of the key standard [[Black–Scholes]] assumptions (such as zero transaction cost, unlimited liquidity, no jumps in price) break down. No active secondary market ever existed for PRDC and banks usually mark their books to some consensus level provided by an [[Markit Group|independent company]]. Anecdotal evidence indicates that nobody would show a bid anywhere close to that consensus level.
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| == PRDC during Subprime Crisis ==
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| PRDC has been the subject of much attention in the market during the [[subprime mortgage crisis]]. By the nature of the trade, investment banks hedging the risks for PRDC structured note issuers will have a short cross gamma position between FX volatility, interest rate and FX. In a volatile market where market parameters move in large and correlated steps, investment banks are forced to rebalance their hedges at a loss, often daily.
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| In particular, when [[Foreign exchange spot|FX spot]] goes up, the hedger for a PRDC note is expected to pay more coupons on a PRDC note. Thus, the hedger is more likely to call the note, reducing the expected duration of the note. In this situation, the hedger has to partially unwind the hedges done at the inception of the PRDC note. For example, he would have to pay swaps in the foreign currency. If FX spot moves in a correlated fashion with the foreign currency swap rate (that is, foreign currency swap rate increases as FX spot increases), he would need to pay a higher swap rate as FX spot goes up, and receive a lower swap rate as FX spot goes down. This is an example of how the hedger of a PRDC note is short cross gamma.
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| This was the main driver behind the increased market volatility in FX skew, long dated FX volatility, long dated Japanese Yen and Australian dollar interest rate, especially during the last quarter of 2008.
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| ==References ==
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| {{Reflist|colwidth=30em}}
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| {{Derivatives market}}
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| [[Category:Derivatives (finance)]]
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| [[Category:Financial terminology]]
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| [[Category:Investment]]
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As you know today Word - Press has turn out to be a tremendously popular open source publishing and blogging display place. You may either choose to link only to the top-level category pages or the ones that contain information about your products and services. You are able to set them within your theme options and so they aid the search engine to get a suitable title and description for the pages that get indexed by Google. Furthermore, with the launch of Windows 7 Phone is the smart phone market nascent App. Once you've installed the program you can quickly begin by adding content and editing it with features such as bullet pointing, text alignment and effects without having to do all the coding yourself.
Usually, Wordpress owners selling the ad space on monthly basis and this means a residual income source. Browse through the popular Wordpress theme clubs like the Elegant Themes, Studio Press, Woo - Themes, Rocket Theme, Simple Themes and many more. You've got invested a great cope of time developing and producing up the topic substance. In crux the developer must have a detailed knowledge not only about the marketing tool but also about the ways in which it can be applied profitably. If you've hosted your Word - Press website on a shared hosting server then it'll be easier for you to confirm the restricted access to your site files.
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