Analytic Valuation Formulas for Range Notes and an Affine Term Structure Model with Jump Risks
Posted: 30 Oct 2008 Last revised: 22 Oct 2010
Date Written: November 1, 2008
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.
Keywords: range note, structured note, hybrid note, affine term structure, jump diffusion, equilibrium model
JEL Classification: C63, G13
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