Targeted Accrual Redemption Note - TARN
Darn...your TARN was terminated! But hey, that’s how they’re designed.
TARNs are Targeted Accrual Redemption Notes: a type of exotic (i.e. uncommon and fancy) derivative that terminates when coupon payments to the holder reach a predetermined threshold before the settlement date. Upon termination, the TARN holder gets the final payment, which is the par value...then the contract is over.
TARNs are good for savvy derivatives traders who like the idea of coupon payments following a pretty fast par value payout. They’re also all right options for forex investors. Yep, there’s FX TARNs for currency exchange.
Like most exotic derivatives, TARNs aren’t for everyone, because they come with their fair share of risk. If the TARN’s underlying security performs poorly, TARN holders can’t tap out. You’ll be stuck with an eroding short-term investment...eh. Not ideal.
And it’s hard to tell if this would happen, since it depends on the volatility of the underlying security. Don’t TARNish your short-term investments with TARNs...unless you’re willing to deal with the risk involved.
Related or Semi-related Video
Finance: What Is a Call Option?25 Views
finance a la shmoop. what is a call option? option? option, where are you? okay
yeah yeah. not phone options, call options. and a close but no cigar. a call option [man smokes in a tub of cash]
is the right to call or buy a security. the concept is easy the math is hard.
you think Coca Cola's poised for a breakout as they go into the new low
calorie beverage business. their stock is at 50 bucks a share and you can buy a [man stands on a stage as crowd cheers]
call option for $1. well that call option buys you the right
to then buy coke stock at 55 bucks a share anytime you want in the next
hundred and 20 days. so let's say Coke announces its new sugarless drink flavor
zero it's two weeks later and the stock skyrockets to fifty eight dollars a
share. you've already paid the dollar for the option now you have to exercise it. [man lifts weights]
so you buy the stock and you're all in now for fifty five dollars plus one or
fifty six bucks a share and your total value is now fifty eight bucks. well you
could turn around today and sell the bundle that moment, and you'll have
turned your dollar into two dollars of profit really fast. and obviously had the [equation on screen]
stock not skyrocketed so quickly well you would have lost everything. still you
lucked out and now you're sitting on some serious cash, courtesy of your call [two men in a tub of cash]
options. as for Coke flavor zero turned out to be nothing more than canned water.
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