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FX Derivatives Trader School by Giles Jewitt

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Chapter 28Accrual and Target Redemption Options

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.

Accrual Options

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:

  1. European: If spot goes through the barrier, accrual stops with what has been accrued retained, but if spot later comes back inside the barrier, accrual restarts.
  2. American Keep: If spot ever goes through the barrier, accrual stops, but what has been accrued prior to that point is retained.

Range Accrual Options

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:

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