Hi everyone,I am a novice in the field of quantitative finance and currently working on pricing of Range accruals. Range accrual pricing invloves addressing 2 major issues1. Convexity Adjustment.If our Benchmark rate and the coupon period is equal, then we do not need any convexity adjustment. But if our Benchmark Rate and coupon period is different, do we use a the Convexity adjusted rate for value of option calculation in Black's model??2. Timing adjustment.Can I use the ratio a/b , where a=df of period between payoff date and benchmark ending date b= df of benchmark period. For timing adjustment??Thanks for your inputs.Kavita

as far as convexity is concerned..yes you have to take care of that using DOUST's formula (as given in PAT's paper) and for the timing adjustment you can do by CF* df(benchmark )/df(CF date of the coupon) ...but i think other forum mates can throw more light on it..... ...i think your a/b is wrong..

Can someone also tell me the most popular Range accrual pricing model used in the market. Is it Pat Hagan's paper or is it Gary Steven Licht's paper.??If it is Gary Licht's paper, can anyone throw some light on how he has taken convexity adjustment into consideration , if at all he has taken convexity adjustment in pricing of range accruals.Thanks a lotKavita

Kavita, sorry, what is a range accrual? I thought I knew that, but after reading your question I think I do not know what's that.

QuoteOriginally posted by: KavitaCan someone also tell me the most popular Range accrual pricing model used in the market. Is it Pat Hagan's paper or is it Gary Steven Licht's paper.??If it is Gary Licht's paper, can anyone throw some light on how he has taken convexity adjustment into consideration , if at all he has taken convexity adjustment in pricing of range accruals.Thanks a lotKavitaI thought most just priced as a series of digitals (with or without an adjustment for payout lag).

Yes Thomssi, you are right. Range accruals are priced as a series of digitals. Infact both Pat Hagan and Garylicht use the same approach. But both have taken timing adjustment. Pat Hagan has also taken convexity adjustment into consideration. I am not sure if Garylicht has taken care of convexity. So wanted to confirm that.ThanksKavita

Thomssi, could you pls help me with Gary Licht model?He says that the Error Term is negligible because j(ti;1/4) > 4 ( j(ti;1/4) < 1/α ). This is because JIBAR is a quarterly rate witch implies α=1/4.Since Libor rates are annually compounded does this imply that α=1 and that the Error Term won’t be negligible ( f(ti;1) > 1 )?(I apologise if it’s a dumb question)Thanks in advance