This topic explains power reversal dual currency notes (PRDCs) and then describes how to use the associated template in SWPM to create and value PRDCs.
PRDCs are principal-protected notes that pay a high initial coupon, ranging from 4%-7%. Subsequent coupons are linked, for example, to the USD/JPY exchange rate, so payments rise if the Yen depreciates. Most are also callable with Bermudan option dates. Coupons are also typically floored at zero. Popular in Japan, PRDCs have been offered to investors looking for high yield in the midst of a prolonged low rate environment. They are also used extensively in the carry trade, where banks and large institutions borrow in Yen to invest in other high-yielding countries.
Typically, the first coupon of a PRDC structure is fixed and subsequent coupons are proportional to an FX rate (domestic currency per one unit of foreign currency). Therefore, the coupon is larger if FX is higher on the coupon date and vice versa. Issuers are effectively short FX options with strikes lower down in FX.
Most PRDCs are sold to Japanese investors, who want to earn higher yields available in other currencies without taking currency risk. On the other side, interest in PRDCs is shown by institutions in high-interest rate countries who want to borrow at low JPY interest rates without taking currency risk. If you look at both sides of the transaction, you can see the basic structure. Say a bank in Europe borrows ten billion JPY from Japanese investors. The bank swaps its interest payments into USD and appears to lock in a JPY interest rate on a USD borrowing. On the other side, the Japanese investor swaps the JPY interest rate for a USD interest rate, but it is still paid in JPY. The investor earns a USD rate paid in JPY.
Consider the following structure as an example. There is a notional of 3.5 MMM JPY. Currency 1 is JPY. Currency 2 is USD. The intro coupon is 2.35% and the intro end date is 08/25/07 (one year from the effective date). The Currency 1 coupon is 10.00% and the Currency 2 coupon is 12.35%. Most PDRCs are callable Bermudan style. In this example, the PDRC is callable on each payment date (semi-annual). Coupons are also floored at zero.
Structured products provide investors the opportunity to outperform traditional investment products by embedding
derivative structures within the product. As structured notes are fixed income products, they offer capital preservation. Yield enhancement products allow investors to potentially obtain higher returns, by embedding an option strategy into a fixed income product. The additional risk generated is tailored to fit your client’s market view and risk appetite.
The advantages of PRDCs are:
• 100% principal guaranteed
• Suitable for investors/ borrowers in low rate markets • Simplicity
You can use shortcuts (e.g., SWPM –PRDC <Go>) to access the structured note template from the command line, or you can click the Products toolbar button to choose a template from a menu. The Main tab can be dynamically resized using the zoom slider or by using Ctrl or Shift and scrolling your mouse wheel.
• For more information about shortcuts, see Shortcuts.
• For information about how to load templates from the toolbar, see Choosing a Template.
SWPM's PRDC template is organized into seven tabs that allow you to set up and analyze the deal. You can structure and value your deal on the Main tab of the template, which is divided into two sections. You can input details of the deal in the deal parameters section, then evaluate the deal in the valuation section.
• Control Area: Allows you to navigate between the tabs, analyze deals, set up scenarios, manage risk, and configure your default settings. For more information, see Control Area.
• Deal Parameters: Allows you to configure your contract parameters. By default, a five-year structure with an intro coupon
of 5% appears. For example, you can enter:
— Deal Parameters: The notional amount, currencies, effective date, and maturity.
— Option: Optionality details. The issuer in most cases has the right to call the note at 100% on each coupon payment
date. You can configure your deal to include this optionality by selecting Bermudan from the Option drop-down. If your deal includes an option, you can configure the option details, including the first call date and the call price.
— Schedule: Cap/floor rates and the amortization schedule. The Schedule field allows you to fully customize the schedule. — Coupon Parameters: The initial coupon and the exchange rate to which subsequent coupons are linked.
For information about a field, position your cursor over it or see Definitions.
• Valuation: Allows you to select the variable you want to solve for and evaluate the deal. You can customize the valuation
by choosing a variable from the Calculate drop-down menu. You can solve for the following variables: Price (%)368 and
Funding Spread (bp)369. You can also choose the model used to price the deal.
SWPM calculates the market value of the deal at the market close of the day indicated in the Market Data field. The
Valuation date is the date at which future cashflows are discounted. For information about a field, position your cursor over it or see Definitions.
Note: By default, SWPM prices deals as of today. To price deals as of a historical date, you must backdate both the
Market Data and Valuation fields. For example, to mark to market at quarter's end, you can enter the historical quarter-end date in both the Market Data and Valuation fields. For example, to mark to market at quarter's end, you can enter the historical quarter-end date in both the Curve Date and Valuation fields. For more information, see Backdating the Valuation.
368 The price in percentage terms.
You can further analyze PRDCs by selecting another tab from the control area. Additionally, you can save your deal by selecting Actions > Save from the toolbar. Once you save the deal, you can access it from other Bloomberg functions or through Bloomberg's API by entering the deal number followed by the <CORP> key. For example, this allows you to download the cashflow schedule for an individual leg to Microsoft® Excel with Bloomberg's API.
• For information about the other tabs that appear on the template, see SWPM Tabs. • For more information about saving deals, see Saving Deals.
• For examples of using the template to price a plain vanilla swap, see Example: Solving for Spread and Example: Solving for
Price.
• For information about Bloomberg's API, see DAPI <Help>.