FX Reset Spec


FX Reset Spec is a
direct subtype of FX Data with functions FX Reset Spec Functions, keys FX Reset Spec keys and example object FxResetSpec that represents the parameters that define how a referenced notional may depend on the spot value of a specified exchange rate.

The exchange rate dependent notional requires the specification of a currency regarded as "foreign" and a respective constant notional amount.

More specifically, the domestic notional Nᵈ(Tᵢ₋₁) applicable at the beginning of the iᵗʰ coupon period (Tᵢ₋₁,Tᵢ) should be reset according to the spot value s(Tᵢ₋₁) of the fx rate FOR/DOM between a foreign currency FOR and a domestic currency DOM observed at time Tᵢ₋₁
When true, the currency FOR must be defined in Ccy and a respective notional amount Nᶠ must be given in Notional that is regarded denominated in FOR
Then the coupon associated with the accrual period (Tᵢ₋₁,Tᵢ) will be based on an effective domestic currency notional Nᵈ(Tᵢ₋₁) given by:
Nᵈ(Tᵢ₋₁) = Nᶠs(Tᵢ₋₁)

Also any change in the effective domestic currency notional will be paid out, just like in the regular amortizing (accreting) notional case.
Concretely, at the beginning of the iᵗʰ coupon period (Tᵢ₋₁,Tᵢ), where i > 1, the difference Nd(Tᵢ₋₁) - Nd(ᵢ₋₂) will be paid out as an outflow.

The redemption amount at maturity equals the product between the effective domestic currency notional at the beginning of the last period and the redemption factor of the underlying bond.

For example, assume a bond is denominated in JPY and carries a notional of 110M, while the foreign currency is USD with a respective foreign notional of 1M.
Then both the JPY-denominated upfront payment - if existing - and the first coupon will be based on the 110M JPY notional.
If the spot USD/JPY rate at the begining of the second coupon period turns out 112.0, then the effective notional pertaining to the second coupon will be 112.0*1M = 112M JPY.
This higher notional will affect the second coupon and will also cause a cash outflow of 112M - 110M = 2M JPY at the end of the first period.
All remaining coupons will be similarly treated, except of the end of the last coupon period where the respective cash outflow will take into account also the redemption rate of the underlying bond.
In particular, if the latter is R and the effective notional at the begining of the last coupon period is N, the amount received at maturity will be RN