Accrual options and target redemption options are both popular within the FX derivatives market. Accrual features and target redemption features are typically added to a forward contract or a strip of forward contracts in order to improve the transaction rate for the client.
The key characteristic of accrual options is that the notional, rather than being static, builds up (accrues) over time. Accrual options have a fixing schedule and the rate of accrual depends on where spot fixes compared to the accrual barriers within the structure. There are two main types of accrual barrier:
The simplest accrual product is a range accrual, which pays out an accrued notional at expiry. Range accrual prices are quoted in payout currency % terms, like touch options or European digital options.
Following are some typical European double barrier range accrual contract details: