Range Accrual


In finance, a range accrual is a type of derivative product very popular among structured-note investors. It is estimated that more than US$160 billion of Range Accrual indexed on interest rates only have been sold to investors between 2004 and 2007. It is one of the most popular non-vanilla financial derivatives. 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.

Range Accrual

What is ‘Range Accrual’

A form of interest accrual in which the coupon rate is only earned on days when another rate from which the coupon is derived falls within a specified range. As such, there is no standard coupon rate that can be counted on for interest payments.

Explaining ‘Range Accrual’

Range accrual notes are complex instruments that are valued and adjusted in a similar manner to American style options. They are typically used by large institutions as a hedge of another position. No official market exists for range accrual notes trading or valuation.

Further Reading

  • Pricing and hedging of quanto range accrual notes under Gaussian HJM with cross‐currency Levy processes – onlinelibrary.wiley.com [PDF]
  • Pricing Range Accrual Interest Rate Swap employing LIBOR market models with jump risks – www.sciencedirect.com [PDF]
  • Pricing Deposit Product of Exchange Rate Range Accrual – en.cnki.com.cn [PDF]
  • Generalized affine transform on pricing quanto range accrual note – www.sciencedirect.com [PDF]
  • Pricing of payment deferred vulnerable options and its application to vulnerable range accrual notes – papers.ssrn.com [PDF]
  • Financial status, corporate governance quality, and the likelihood of managers using discretionary accruals – www.emerald.com [PDF]
  • The economics of short-term performance obsession – www.tandfonline.com [PDF]
  • Comparing abnormal accruals estimates across samples: An international test – www.tandfonline.com [PDF]
  • Accounting accruals and stock returns: Evidence from European equity markets – www.tandfonline.com [PDF]
  • Accrual accounting in EU local governments: One method, several approaches – www.tandfonline.com [PDF]