Target Redemption Fowards (TARFs) are complex OTC financial instruments used in FX markets. An instrument type that many of us will have heard about in passing, but not had the need or time to delve into the details.
My colleagues, Serena Manti and Gianluca Molteni have written the first of a series of articles on TARFs, please read at Handling the complexities of TARF FX options.
We should stop calling a TARF an option.
It is not an option, there is no optionality and it is missing many key attributes of an option like call/put, american/european, etc.
The problem if we pretend those are options we will have to report them as options as well under EMIR and other jurisdiction, but without those option attributes, our reporting would be rejected.
It is true a TARF can be modelled as a package of multiple options, but again this would be disastrous for our reporting as in such case we would have to report 2 options (a call and a put) for each fixing, so if we have 52 fixing we would have to report 104 options (with the same Package ID), with 104 UTIs that should be agreed with our counterparty. This is completely unrealistic.
So a TARF is just a complex derivative or eventually a forward non-standard