Generalized affine transform on pricing quanto range accrual note |
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| Institution: | 1. School of Securities and Futures, Southwestern University of Finance and Economics, China;2. Department of Finance, National Central University, No. 300, Jhongda Rd., Jhongli City, Taoyuan County 32001, Taiwan, ROC;3. School of Securities and Futures, Southwestern University of Finance and Economics, No. 55, Guanghuacun Street, Chengdu, Sichuan 610074, China;1. Eastern Mediterranean University, Northern Cyprus, via Mersin 10, Turkey;2. Institute of Labor Economics (IZA), Bonn, Germany;3. Economic Research Forum (ERF), Cairo, Egypt;4. Gazi University, Ankara, Turkey;5. University of Nebraska-Omaha, USA;1. Department of Actuarial Science & Mathematics, Sungkyunkwan University, 25-2, Sungkyunkwan-Ro, Jongno-Gu, Seoul 03063, Republic of Korea;2. School of Business, Ewha Womans University 52, Ewhayeodae-gil, Seodaemun-Gu, Seoul 03760, Republic of Korea;3. Department of Mathematics, Saint Joseph’s University, 5600 City Avenue, Philadelphia, PA 19131, USA;1. School of Finance, Southwestern University of Finance and Economics, Chengdu, Sichuan, PR China;2. School of Economics and Management, Southwest Jiaotong University, Chengdu, Sichuan, PR China;1. Department of Finance, California State University, Fullerton, United States;2. Institute of Finance, National Chiao Tung University, Taiwan;3. China University of Technology and National Chiao Tung University, Taiwan |
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| Abstract: | This paper was to price and hedge a quanto floating range accrual note (QFRAN) by an affine term structure model with affine-jump processes. We first generalized the affine transform proposed by Duffie et al. (2000) under both the domestic and foreign risk-neutral measures with a change of measure, which provides a flexible structure to value quanto derivatives. Then, we provided semi-analytic pricing and hedging solutions for QFRAN under a four-factor affine-jump model with the stochastic mean, stochastic volatility, and jumps. The numerical results demonstrated that both the common and local factors significantly affect the value and hedging strategy of QFRAN. Notably, the factor of stochastic mean plays the most important role in either valuation or hedging. This study suggested that ignorance of these factors in a term-structure model will result in significant pricing and hedging errors in QFRAN. In summary, this study provided flexible and easily implementable solutions in valuing quanto derivatives. |
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| Keywords: | Affine transform Affine-jump Stochastic mean Stochastic volatility |
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