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Analytic valuation formulas for range notes and an affine term structure model with jump risks

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  • Jang, Bong-Gyu
  • Yoon, Ji Hee
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    Abstract

    We derive analytic valuation formulas for range accrual notes and spread range accrual notes under an affine term structure model with jump risks. We show that the value of a range accrual note can be significantly affected by the choice of interest rate model and the arrival intensity of jump risks. We also show that misuse of the correlation between reference rates of a spread range accrual note may lead traders and risk managers to mispricing of the note.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 34 (2010)
    Issue (Month): 9 (September)
    Pages: 2132-2145

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    Handle: RePEc:eee:jbfina:v:34:y:2010:i:9:p:2132-2145

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    Web page: http://www.elsevier.com/locate/jbf

    Related research

    Keywords: Range note Structured note Hybrid note Affine term structure Jump diffusion Equilibrium model;

    References

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    Cited by:
    1. Baaquie, Belal E. & Du, Xin & Tang, Pan & Cao, Yang, 2014. "Pricing of range accrual swap in the quantum finance Libor Market Model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 401(C), pages 182-200.

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