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Quantitative Finance · Begrippenlijst

Wat is Callable range accrual?

Definition 9.12 Rates, Credit, XVA and Risk · Hoofdstuk 9 — Bermudans and Callables

A callable range accrual is a callable note whose coupon accrues only on days when a reference rate stays within a range; the issuer’s call makes it a Bermudan on a portfolio of digital options, and it is priced with the same exercise methods, on a model that also fits the smile.

The flows of a callable Formosa issue. The investor sells the call right to the issuer for a higher yield; the issuer passes it to a dealer inside the swap that turns the bond into floating funding; the dealer, long a Bermudan, sells volatility to hedge it.
Figure 9.3. The flows of a callable Formosa issue. The investor sells the call right to the issuer for a higher yield; the issuer passes it to a dealer inside the swap that turns the bond into floating funding; the dealer, long a Bermudan, sells volatility to hedge it.
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