Abstract
This paper investigates the pricing of the snowball note based on Hull-White term structure model and Quadrature method. Snowball notes can be considered as sophisticated inversing floating rate bonds with path-dependent coupons and redemption right. Because of these complications, there are no accurate closed form solutions for snowball notes. It is also difficult to develop an efficient numerical
pricing method. This study shows that the calculation of coupons for snowball notes can be drastically simplified under Hull-White interest rate tree model. To further reduce the distribution error, we combine Hull-White model with Quadrature method, and then construct an efficient and accurate pricing method. Numerical simulations
using market data are provided as examples of applications for practitioners in the industry.
pricing method. This study shows that the calculation of coupons for snowball notes can be drastically simplified under Hull-White interest rate tree model. To further reduce the distribution error, we combine Hull-White model with Quadrature method, and then construct an efficient and accurate pricing method. Numerical simulations
using market data are provided as examples of applications for practitioners in the industry.
| Translated title of the contribution | Pricing Snowball Notes with Hull-White Model and Quadrature Method |
|---|---|
| Original language | Chinese (Traditional) |
| Pages (from-to) | 73-108 |
| Number of pages | 36 |
| Journal | Journal of Futures and Options |
| State | Published - Dec 2008 |
Keywords
- snowball notes
- Hull-White model
- Quadrature methods
- distribution error