This document describes using a Monte Carlo simulation to price a foreign exchange (FX) target redemption note. The note pays annual coupons based on the exchange rate between two currencies, with the first coupon fixed and subsequent coupons varying. It terminates if accumulated coupons reach a cap. The simulation models the FX rate and domestic/foreign interest rates as correlated stochastic processes. It runs trials simulating the rates over time, calculates coupons, and discounts cash flows to value the note. The Hull-White model is used to simulate the interest rate processes.

1. Pricing Of FX Target Redemption Note By
Simulation
Shing Hing Man
http://lombok.demon.co.uk/financialTap/
October 23, 2012
Abstract
A Monte Carlo method to price a FX target Redemption note is de-
scribed.
1 Introduction And Notation
A FX target redemption note (FX TARN) is a note that pays coupon at regular
intervals on a

2. xed notional. The

3. rst coupon is