Range accrual fx option

In finance , a range accrual is a type of derivative product very popular among structured-note investors.

In essence the investor in a range accrual is betting that the reference "index" - usually interest rates or currency exchange rates - will stay within a predefined range. The index could be an interest rate e. USD 3 months Libor , or a FX rate e.

Range Accrual Notes | Derivatives Risk Management Software & Pricing Analytics | FINCAD

The observation period can be different from daily e. The receiver of the range accrual coupons is selling binary options.

The value of these options is used to enhance the coupon paid. Let's take an example of a 5 years range accrual note linked to USD 3 months Libor, with range set as [1. Let's assume the note to start on January 1, and the first coupon payment to happen on July 1, The payout P in our notation , for each day the index is in the range, could be either a fix or variable rate.

Derivatives | Range Accrual Option

A range accrual can be seen as a strip of binary options , with a decreasing lag between fixing date and payment date. For this reason, it is important the valuation model is well calibrated to the volatility term structure of the underlying, at least at the strikes implied by the range.

If furthermore the range accrual is callable , then the valuation model also needs to take into account the dynamic between the swaption and the underlying. Accrual swaps that monitor permanence of interest rates into a range and pay a related interest rate times the permanence factor also depend on correlation across different adjacent forward rates.

For the details see for example Brigo and Mercurio From Wikipedia, the free encyclopedia. Retrieved from " https: Investment Mathematical finance Options finance.

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Range Accrual

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