Pricing TARN options with a stochastic local volatility model

Abstract

Target Accumulation Redemption Notes (TARNs) are financial derivatives which give their holders the right to receive periodic coupons until the accumulated sum of those ones reaches an agreed target. In this work, we solve a partial differential equations (PDEs) model for pricing TARN options by implementing an alternatingdirection implicit finite difference method (ADI method). We combine the numerical solution with a stochastic local volatility (SLV) technique and show the numerical results for a particular example.