This case provides an opportunity for the introduction and application of the pure expectations theory of interest rates. It also brings the basics of option pricing option in the long-term mortgage embedded alternative considering the refinancing. Because of the refinancing option, the spread of the Bank for the long-term mortgage is charging too low, suggesting that an arbitrage opportunity available by being a “homemade” interest rate swap.

This case provides an opportunity for the introduction and application of the pure expectations theory of interest rates. It also brings the basics of option pricing option in the long-term mortgage embedded alternative considering the refinancing. Because of the refinancing option, the spread of the Bank for the long-term mortgage is charging too low, suggesting that an arbitrage opportunity available by being a “homemade” interest rate swap.
This is a Darden case study.
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from
Kenneth Eades,
S. Brooks Marshall
Source: Darden School of Business
7 pages.
Publication Date: Feb 19, 1996. Prod #: UV0498-PDF-ENG
Locked Tight Storage Facilities HBR case solution

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