 Generalized affine transform on pricing quanto range accrual noteShaoyu Li, Henry H. Huang and Teng Zhang The North American Journal of Economics and Finance, 2020, vol. 54, issue C 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. Keywords: Affine transform; Affine-jump; Stochastic mean; Stochastic volatility (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:54:y:2020:i:c:s106294081830295x DOI: 10.1016/j.najef.2018.12.004 Access Statistics for this article The North American Journal of Economics and Finance is currently edited by Hamid Beladi More articles in The North American Journal of Economics and Finance from Elsevier |
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