Analytical valuation of autocallable notes

Tristan Guillaume

International Journal of Financial Engineering (IJFE), 2015, vol. 02, issue 02, 1-23

Abstract: In this paper, a general form of autocallable note is analytically valued, which includes the following features: regular coupons, reverse convertible provision and possible participation in the growth of the underlying equity asset. Simpler notes can be designed and analytically priced on the basis of this general structure. The equity asset follows a jump-diffusion process, while interest rates are driven by a two-factor model. Equity and interest rate sources of randomness are correlated. The numerical implementation is easy and very efficient compared to alternative valuation techniques. The formula provided in this paper can thus be expected to be a valuable tool for both buyers and issuers in terms of pricing and risk management.

Keywords: Autocallable; valuation; jump-diffusion; equity-rate correlation; multivariate normal distribution; G13; C63 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (3)

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DOI: 10.1142/S2424786315500164

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