Model
The pricing of PRDCs used to be done using 3-factor grid/lattice or Monte Carlo models where one factor represents the short rate in currency1; the second factor the short rate in currency2; and the third factor the movement in the FX rate between currency1 and currency2.
Model choice for the interest rate factors varies - for speed reasons, popular choices are Hull-White model, Black-Karasinski model, and extended Cheyette model.
FX model choice also varies among houses - popular choices are Dupire-type local volatility models, stochastic SABR Volatility Models, or models which allow mixing of the two.
Nowadays, most dealers use a variant of the industry-standard LIBOR market model to price the PRDCs.
Read more about this topic: Power Reverse Dual Currency Note
Famous quotes containing the word model:
“The Battle of Waterloo is a work of art with tension and drama with its unceasing change from hope to fear and back again, change which suddenly dissolves into a moment of extreme catastrophe, a model tragedy because the fate of Europe was determined within this individual fate.”
—Stefan Zweig (18811942)
“She represents the unavowed aspiration of the male human being, his potential infidelity—and infidelity of a very special kind, which would lead him to the opposite of his wife, to the “woman of wax” whom he could model at will, make and unmake in any way he wished, even unto death.”
—Marguerite Duras (b. 1914)
“When you model yourself on people, you should try to resemble their good sides.”
—Molière [Jean Baptiste Poquelin] (1622–1673)