Analytic Valuation Formulas for Range Notes and an Affine Term Structure Model with Jump Risks

Posted: 30 Oct 2008 Last revised: 22 Oct 2010

See all articles by Bong-Gyu Jang

Bong-Gyu Jang

Pohang University of Science and Technology (POSTECH)

Ji Hee Yoon

University College London - Department of Economics

Date Written: November 1, 2008

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.

Keywords: range note, structured note, hybrid note, affine term structure, jump diffusion, equilibrium model

JEL Classification: C63, G13

Suggested Citation

Jang, Bong-Gyu and Yoon, Ji Hee, Analytic Valuation Formulas for Range Notes and an Affine Term Structure Model with Jump Risks (November 1, 2008). Journal of Banking and Finance, Vol. 34, No. 9, 2010. Available at SSRN: https://ssrn.com/abstract=1291703

Bong-Gyu Jang (Contact Author)

Pohang University of Science and Technology (POSTECH) ( email )

77 Cheongam-ro
Pohang
Korea, Republic of (South Korea)

Ji Hee Yoon

University College London - Department of Economics ( email )

Drayton House, 30 Gordon Street
30 Gordon Street
London, WC1H 0AX
United Kingdom

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