BNP Paribas has started offering exotic interest-rate derivatives, which combine a range accrual coupon with a step-up feature to give investors a high yielding instrument if rates stay low. The product, dubbed Racer for Range Accrual Callable Ratchet, is based on a snowball, but the firm has added leverage and a cap to generate more yield, explained Kara Lemont, a marketer in the interest rate derivatives structuring group in London.
Investors get a higher coupon the more days the interest rate stays between two barriers. For an indicative example, see table.
Lemont said the product is part of a wider trend, in which derivatives shops are combining exotic derivatives, such as constant-maturity swaps and range accruals, to boost yields. The products are popular across Europe and Asia, especially with retail banks and investment funds, noted Lemont.
| Payout Scenarios |
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| Index equal to Current Forward Rates - Assuming Range Accrual Index below the Upper Barrier for 50%, 75% and 100% of the days during the Calculation Period | |||||
| Period | Fixing Rate | Upper Barrier | Coupon Rate | Coupon Rate | Coupon rate |
| n/N = 50% | n/N = 75% | n/N = 100% | |||
| 1 | 2.24% | 6.00% | 6.00% | 6.00% | |
| 2 | 2.50% | 6.00% | 6.00% | 6.00% | |
| 3 | 2.74% | 3.25% | 3.01% | 4.51% | 6.01% |
| 10 | 4.16% | 4.65% | 0.03% | 0.62% | 6.10% |
| 15 | 4.79% | 5.30% | 0.01% | 0.17% | 6.15% |
| 20 | 4.98% | 5.50% | 0.03% | 0.13% | 6.35% |
