Subject category:
Finance, Accounting and Control
Published by:
Darden Business Publishing
Length: 7 pages
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Abstract
This case provides an opportunity to introduce and apply the pure- expectations theory of interest rates. The case also brings out the fundamentals of option pricing by considering the refinancing option embedded in the long-term mortgage alternative. Because of the refinancing option, the spread charged by the bank for the long-term mortgage is too low, which suggests that an arbitrage opportunity is available by constructing a ''homemade'' interest-rate swap.
Subject category:
Finance, Accounting and Control
Published by:
Darden Business Publishing
Length: 11 pages
Data source: Field research
About
Abstract
This case provides an opportunity to introduce and apply the pure- expectations theory of interest rates. The case also brings out the fundamentals of option pricing by considering the refinancing option embedded in the long-term mortgage alternative. Because of the refinancing option, the spread charged by the bank for the long-term mortgage is too low, which suggests that an arbitrage opportunity is available by constructing a ''homemade'' interest-rate swap.
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Subject category:
Finance, Accounting and Control
Published by:
Darden Business Publishing
Length: 11 pages
Data source: Field research