FX Accumulator Options
Hi all
I'll be interning this summer, and recently they've come back to me saying I will be doing something related to this. naturally, I went to check it up, but it seems to me that there's very little about FX accumulator options on the net. Is it a very specialized product? Can someone explain this to me? thanks to everyone in advance!
Yes. from text book:
Accumulator options overviewAn accumulator option is a regular forward contract where the notional of the forward is determined over the life of the option up to the expiry date rather than by a predefined value.
At expiration the exact notional depends on all of the following combined:
Predefined spot condition This can be set as a range, where the spot must be inside or outside the range, or as a one-sided condition, where the spot is above or below a predetermined trigger. Number of fixings on which the predefined spot condition is met Total number of fixings Type of accumulator you choose:
Accumulator in—each time the spot condition is met on a fixing date, a proportion of the notional is paid (the final notional increases). Accumulator out—each time the spot condition is met on a fixing date, a proportion of the notional is deducted from the maximum that can be used (the predefined notional decreases). If the option is an:
Accumulator in, on expiry date the notional is: n/N x ‹notional amount› Accumulator out, on expiry date the notional is: ‹notional amount› - (n/N x ‹notional amount›) Where:
‹notional amount› is the maximum notional amount set in the fader option. n is how many times the spot satisfies the predefined condition on the predefined fixing dates. N is how many fixings dates there are over the life of the option (N). An accumulator option is decomposed into buying (selling) a fader call and selling (buying) a fader put. However, bear in mind that with an accumulator you are obliged to exchange currencies, whereas with a fader you have the right not the obligation.
Why buy an accumulator? An accumulator is a popular structured product for corporates looking for a forward style hedge.
You would buy an accumulator if both of the following are true:
You have a very specific view of the spot rate movement. You are looking to achieve a better forward rate than the prevailing forward rate in the market at the time of trading. You achieve a better rate because you are taking a risk not knowing the notional in advance.
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