A PDE pricing framework for cross-currency interest rate derivatives with target redemption features

Christara, Christina C., Dang, Duy-Minh, Jackson, Kenneth R. and Lakhany, Asif (2010). A PDE pricing framework for cross-currency interest rate derivatives with target redemption features. In: Theodore E. Simos, George Psihoyios and Ch. Tsitouras, Numerical Analysis and Applied Mathematics - International Conference on Numerical Analysis and Applied Mathematics 2010, ICNAAM 2010. ICNAAM 2010: International Conference on Numerical Analysis and Applied Mathematics 2010, Rhodes, Greece, (330-333). 19 - 25 September 2010. doi:10.1063/1.3498467


Author Christara, Christina C.
Dang, Duy-Minh
Jackson, Kenneth R.
Lakhany, Asif
Title of paper A PDE pricing framework for cross-currency interest rate derivatives with target redemption features
Conference name ICNAAM 2010: International Conference on Numerical Analysis and Applied Mathematics 2010
Conference location Rhodes, Greece
Conference dates 19 - 25 September 2010
Proceedings title Numerical Analysis and Applied Mathematics - International Conference on Numerical Analysis and Applied Mathematics 2010, ICNAAM 2010   Check publisher's open access policy
Series AIP Conference Proceedings
Place of Publication College Park, MD United States
Publisher American Institute of Physics
Publication Year 2010
Year available 2010
Sub-type Fully published paper
DOI 10.1063/1.3498467
ISBN 9780735408340
0735408343
9780735408357
ISSN 0094-243X
Editor Theodore E. Simos
George Psihoyios
Ch. Tsitouras
Volume 1281
Start page 330
End page 333
Total pages 4
Collection year 2010
Language eng
Abstract/Summary We propose a general framework for efficient pricing via a partial differential equation (PDE) approach for exotic cross-currency interest rate (IR) derivatives, with strong emphasis on long-dated foreign exchange (FX) IR hybrids, namely Power Reverse Dual Currency (PRDC) swaps with a FX Target Redemption (FX-TARN) provision. The FX-TARN provision provides a cap on the FX-linked PRDC coupon amounts, and once the accumulated coupon amount reaches this cap, the underlying PRDC swap terminates. Our PDE pricing framework is based on an auxiliary state variable to keep track of the total accumulated PRDC coupon amount. Finite differences on uniform grids and the Alternating Direction Implicit (ADI) method are used for the spatial and time discretizations, respectively, of the model-dependent PDE corresponding to each discretized value of the auxiliary variable. Numerical examples illustrating the convergence properties of the numerical methods are provided.
Subjects 3100 Physics and Astronomy
Keyword Partial Differential Equation (PDE)
Power Reverse Dual Currency (PRDC) swaps
Target Redemption (TARN)
Q-Index Code E1
Q-Index Status Provisional Code
Institutional Status Non-UQ

Document type: Conference Paper
Collection: School of Mathematics and Physics
 
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Created: Wed, 01 Oct 2014, 11:55:00 EST by Kay Mackie on behalf of Examinations