An analysis of yield curve notes

Article Abstract:

This paper analyzes a new type of security, the yield curve note, which pays interest at a rate that varies inversely with short-term interest rates. A valuation model for yield curve notes is presented, the parameters of the model are estimated empirically, and the estimated model is used to explore, in simulation, the price behavior and risk characteristics of yield curve notes in comparison with fixed-rate notes. The risk of a yield curve note is approximately twice as great as a fixed-rate note with the same maturity. The unique risk characteristics of yield curve notes make them useful (as liabilities) in immunization strategies for financial institutions. Their usefulness in this regard may be the chief rationale for their development. (Reprinted by permission of the publisher.)

Economic aspects, Return on investment, Rate of return, Floating rate notes, Negotiable instruments

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Intra-day arbitrage opportunities in foreign exchange and Eurocurrency markets

Article Abstract:

We have two primary objectives in this study. First, we examine the frequency of attaining simultaneous equilibrium on spot and forward foreign exchange markets and on domestic and foreign securities markets. Second, we measure the profitability of covered interest arbitrage and one-way arbitrage. Our empirical analysis has been conducted using real-time quotations. The empirical results indicate that: (a) the markets are efficient in the sense that profit opportunities from traditional covered interest arbitrage are rarely available; and (b) the frequency of attaining simultaneous market equilibrium is surprisingly low, thus opening the door for one-way arbitrage. (Reprinted by permission of the publisher.)

Foreign exchange, Eurocurrency market

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The relationship between arbitrage and first order stochastic dominance

Article Abstract:

Stochastic dominance and arbitrage pricing theories are analyzed, using a process of derivation and proof with respect to a characterization theorem. The theorem identifies the conditions under which arbitrage opportunities arise. These conditions are described in terms of the existence of two assets when one stochastically dominates the other, and in terms of pricing for particular contingent claims.

Case studies, Prices and rates, Stocks, Stochastic analysis, Stock prices, Commodity exchanges

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