TARF Tantrums

Explaining why the product causes headaches.

News recently broke about UBS facing headaches regarding TARFs sold to private clients that blew up on USD/CHF. This provided yet another case of TARFs being problematic, with a story usually rearing its head once a year (either in the media or over dinner at Boisdale’s).

It raises the question of why TARFs seem to cause the biggest issues with end users in the FX derivative space. Today, having traded TARFs in the past on the sell side, we wanted to review some of the points that we believe make TARFs both existing and dangerous.

For those not familiar, a target accrual redemption forward (TARF) is a type of FX options structure which offers an enhanced initial strike rate versus a forward contract, with a limited amount of potential accrued gains and a worst-case scenario of buying a leveraged amount at the strike rate for the length of the contract.