Forex Investment and Currency Trading

Description
A Multicallable Range Accrual Note / Deposit (or MCRA) is a range accrual note/deposit where the fixed coupon accrues on days when the agreed index falls within the pre-defined range, with no coupon accrual when the agreed index falls outside of the pre-defined range. To enhance the yield further, a multicallable feature (or Bermudan Swaption) is added, giving the note issuer the right to terminate the structure on a number of agreed future dates.

Application

In this example, the coupon on the note/deposit has been enhanced significantly (5.5%, as compared to 3.60% money market yield) due to the combination of the range accrual and the callability features.

• The investor receives a coupon of 5.5% for each observation day that 6mth SGD SOR fixes between 3.00% and 5.00%.
• If the reference rate stays within the accrual range for 65% of the tenor of the note, the investor’s yield will exceed that available on a 10 year money market investment, since 5.5% x 65% = 3.6%. However, there is a risk that the yield will be significantly lower as the investor would receive no coupon for those days that 6mth SGD SOR fixes outside the reference range.
• The note issuer has a right to terminate the structure semi-annually (except for the first period), which exposes the investor to reinvestment risk.
• From the viewpoint of the investor, the MCRA can be decomposed into (i) a floating rate deposit vs the 6mth SGD SOR rate, (ii) a swap (receiving 5.5% vs 6mth SGD SOR), (iii) the sale of a strip of daily digifloors @ 3.00% and daily digicaps @ 5.00%, and (iv) the sale of a Bermuda Swaption based on (ii) + (iii) (in effect, the underlying Range Accrual Swap).
• The coupon enhancement will be improved when (i) the SGD curve is steep, (ii) the implied forward curve is closer to the lower and upper boundaries, and/or (iii) the relevant volatilities are high.

Variations

• It is not uncommon for the range accrual on the fixed coupon to begin only once the structure becomes callable.
• The MCRA coupon can be stepped up over the tenor, or structured as a floating rate plus a spread.
• Step-up accrual ranges are common, with most investors wishing to reflect the shape of the forward curve.
• For long tenor MCRAs it is usually possible to guarantee a minimum coupon. Of course this will adversely impact the other terms of the structure.