So How Are All Those Yuan Structured Products Doing?

Hi, Mr. Chief Financial Officer of Generic China Corp. This is John Doe from sales at Solidly Second-Tier Bank. How are you? Listen, I think I have something that might interest you. Ever heard of a Target Redemption Forward? No? Let me explain. It’s a structured product, kind of like a series of exotic options that pay a monthly income as long as the spot yuan exchange rate remains above the strike price. Now, I hate to mention this, but I want to be up front with you, because you know I value your business. The risk here is that if the yuan falls below a certain level—say, 6.2 against the dollar—the option gets knocked out and you have to pay out double the amount. I personally don’t see that happening any time soon. I mean, with USD/CNH trading in this kind of range, we’re talking practically no-risk money. You’re in? Great!

It’s worth wondering now, days after the People’s Bank of China sprang a surprise devaluation of the yuan on markets, just how all those FX Target Redemption Forwards (Tarfs) are doing. With Tarfs predicated on the USD/CNH rate moving within a predictable range, this week’s events are unlikely to produce good news for companies, like Generic China, that snapped up the products and still have contracts outstanding.