Pricing and hedging of quanto range accrual notes under Gaussian HJM with cross‐currency Levy processes

Abstract

We would like to thank the editor of this journal, Robert I. Webb, and an anonymous referee for their very useful comments and suggestions. The remaining errors are solely ours. SZU-LANG LIAO* PAO-PENG HSUThis study analyzes the pricing and hedging problems for quanto range accrual notes (RANs) under the Heath-Jarrow-Morton (HJM) framework with Levy processes for instantaneous domestic and foreign forward interest rates. We consider the effects of jump risk on both interest rates and exchange rates in the pricing of the notes. We first derive the pricing formula for quanto double interest rate digital options and quanto contingent payoff options; then we apply the method proposed by Turnbull ( Journal of Derivatives, 1995, 3, 92-101) to replicate the quanto RAN by a combination of the quanto double interest rate digital options and the quanto contingent payoff options. Using the pricing formulas derived in this study, we obtain the hedging position for each issue of quanto

Valuation of Quanto Floating Range Notes under the Cross-Currency LIBOR Market Model

“…Wu et al (2008) provided a general pricing formula for FRNs in the framework of the LIBOR market model. Liao et al (2009) analyzed the pricing and hedging problems for QFRNs under the HJM framework with a Lévy process for instantaneous domestic and foreign forward interest rates.…”