The power feature comes with a higher risk for the investor, which characterizes the product as leveraged carry trade.
Cash flows may have a digital cap feature where the rate gets locked once it reaches a certain threshold.
Other add-on features include barriers such as knockouts and cancel provision for the issuer.
Nowadays, most dealers use a variant of the industry-standard LIBOR market model to price the PRDCs.
For Callable PRDCs – which are not replicable – the present value and the risks are now computed using quasi-Monte Carlo simulations and can take several hours.
While such hedges are theoretically possible, there are a lot of practical difficulties, largely due to the following situation.
The owners of the PRDC notes, usually retail investors, don't hedge their risks in the market.
The note holders would be the natural counterparty for the hedge, but they don't take part in this market (similar to buyers of portfolio insurance in 1987).
The volume of PRDC notes issued has been so large that the hedging and rebalancing requirements far exceed the available liquidity in several key markets.
However every model is derived under the assumption that there is sufficient liquidity – in other words, they are potentially mispricing the trades because in this market, a few of the key standard Black–Scholes assumptions (such as zero transaction cost, unlimited liquidity, no jumps in price) break down.
No active secondary market ever existed for PRDC and banks usually mark their books to some consensus level provided by an independent company.