The pricing of interest rate swaps

Interest rate swaps have become an important tool for financial institutions because they provide a convenient way to reduce interest rate risk. Swaps allow financial institutions to obtain short-term deposits in the local deposit market and then transform these into longer-term liabilities. The growth of swaps has been explosive, with the swap market growing from nothing in 1981 to an estimated $889 billion in 1987. In addition to their role in managing interest rate risk, swaps have become important to financial managers for other reasons, and as a result the swap market is monitored by financial managers as are money and capital markets. Because of its growing importance, an empirical perspective on how swaps are priced is needed. This article develops a simple market model and then estimates the model using data provided by three major swap market participants.     

On the origin of shared beliefs (and corporate culture)

This article shows how corporate culture, in the sense of shared beliefs and values, originates (often unintentionally) through screening, self‐sorting, and manager‐directed joint learning. It shows that such culture will be stronger among more important employees and in older and more successful firms where employees make important decisions and the manager has strong beliefs. It further shows how a manager's beliefs influence culture, how culture persists despite turnover, and why the suggested link between culture and performance may be a case of inverse causality. It finally shows that, from an outsider's perspective, organizations may tend to overinvest in corporate culture.     

V. E. Gamborg

Abstract

A glance at the numerous papers dealing with the influence of the rate of interest on the value of premiums will show that most authors aim at computing annuity values for a new rate of interest without first re-calculating the commutation columns, It is only in exceptional cases that they derive premiums or policy-values directly, i.e. without first finding annuity values.² Apart from the fact, that both premiums and policyvalues are implicitly given by a set of annuity values, the reason for the usual procedure lies in the type of calculations which is contemplated, since they cannot conveniently be applied to such ratios as premiums and policy-values. In the following lines we show how the method developed by A. J. Lotka ³ for the calculation of the rate of increase of a stable population is capable of generalisation and of successful application to our problem; thus the detour via the calculation of annuity values can be avoided.     

Politicians’ motivation,political culture,and electoral competition

We study electoral competition among politicians who are heterogeneous both in competence and in how much they care about (what they perceive as) the public interest relative to the private rents from being in office. We show that politicians may have stronger incentives to behave opportunistically if other politicians are more likely to behave opportunistically. A political culture may therefore be self-reinforcing and multiple equilibria may arise. We also show that politicians’ incentives to behave opportunistically increase with politicians’ pay and with polarization of policy preferences. JEL Code D72 · D78     

Pre‐Issuance Hedging of Fixed‐Rate Debt

This article analyzes several corporate hedging strategies to manage interest rate risk on fixed‐rate debt prior to issuance. The authors start by considering these strategies using a highly stylized model: a binomial forward interest rate tree that, while simple in design, illustrates derivative pricing methodologies that are used in practice. Under a given rate volatility assumption, they demonstrate expected outcomes when entering a forward bond contract, a forward‐starting pay‐fixed interest swap, and a purchased option on that swap, as well as the “default” alternative of doing nothing. In principle, the decision of whether or not to hedge, as well as how to do so, depends on management's view of future interest rate volatility and degree of comfort with possible outcomes. The authors then assess the pros and cons of hedging strategies, with considerable emphasis on practical considerations. For example, while their theoretical model would allow an issuer to “lock” a specific debt issuance, in practice one can hedge only “benchmark” interest rate risk. The authors describe the use of both Treasury locks and forward‐starting swaps to address unexpected benchmark yield changes, and discuss how factors such as the time to issuance affect an issuer's choice of instrument. For instance, Treasury locks are typically used when the time to issuance is relatively short, while interest rate swaps are more common for longer times to issuance. The article also discusses circumstances in which a “do nothing” strategy may be preferable to other alternatives, as well as the disadvantages of issuing in advance. Finally, the authors describe the impact of financial accounting on different hedge strategies.     

英国利率市场化的历史沿革与银行业应对策略

国际经验表明,一国利率市场化改革有力推进了银行业经营理念和发展模式革新,而商业银行利率定价管理能力的提高,也会对市场利率变化趋势产生影响。文章回顾了英国利率市场化改革的简要历程及其对银行业利率和利差水平变化的影响,重点考察了英国银行业的应对策略及其成熟的定价管理模式,并就国内银行业如何借鉴国际经验以有效应对利率市场化的机遇与挑战进行了思考。     

The Cost of Duplicative Regulation: Evidence From Risk Retention Groups

A vast majority of insurers are regulated by each state in which they conduct business; however, a small subset of specialized firms, risk retention groups (RRGs), are largely exempt from most aspects of duplicative regulation no matter how many states they operate. This article analyzes the differences between RRGs and standard insurers specializing in commercial liability insurance to determine the cost of duplicative regulation. The costs associated with multi‐state regulation are significantly higher than those for single‐entity regulation. These high regulatory compliance costs reduce the technical efficiency of firms, deter firms from operating in additional states, and increase the price of insurance.     

Corporate cash holdings: Causes and consequences

The considerable growth in corporate cash holdings around the world has prompted scholarly interest. Consequently, there is now a large academic literature examining cash holdings and their impact on corporate outcomes and firm values. This article reviews and synthesizes the literature to offer insight into two primary motives to hold cash: precautionary and agency. We first present a stylized model that explores the trade-off in holding cash between these two motives and then examine empirical studies to determine how existing theories are supported by evidence using data from a variety of countries. In addition, we examine the effectiveness of a variety of corporate governance devices in curtailing cash holdings and also the extent to which these devices offer investors' confidence that cash will not be wasted. Finally, we discuss methodological and measurement issues associated with empirical cash holdings studies.     

The RPF Model for Calculating the Equity Market Risk Premium and Explaining the Value of the S&P with Two Variables

This article presents a remarkably simple Risk Premium Factor Model that explains S&P Index levels from 1960 to the present with considerable accuracy using only the risk-free rate, S&P 500 operating earnings, and a small number of simplifying assumptions. Instead of a fixed Equity Risk Premium, the model employs a new approach for estimating the Equity Risk Premium called the Risk Premium Factor, or “RPF.” The RPF, which is consistent with the theory of loss aversion associated with Kahneman and Tversky's “prospect theory,” calculates the general market risk premium as a direct function of the level of interest rates—that is, falling when interest rates are low and rising when they are high—thereby amplifying the effects of changes in interest rates on stock prices. The RFP model suggests that the decline in U.S. risk-free rates since the early 1980s has accounted for more than half of the growth in the S&P 500 since then.     

The Valuation of Options on Futures Contracts

Rational restrictions are derived for the values of American options on futures contracts. For these options, the optimal policy, in general, involves premature exercise. A model is developed for valuing options on futures contracts in a constant interest rate setting. Despite the fact that premature exercise may be optimal, the value of this American feature appears to be small and a European formula due to Black serves as a useful approximation. Finally, a model is developed to value these options in a world with stochastic interest rates. It is shown that the pricing errors caused by ignoring the location of the interest rate (relative to its long-run mean) range from ?5% to 7%, when the current rate is ±200 basis points from its long-run value. The role of interest rate expectations is, therefore, crucial to the valuation. Optimal exercise policies are found from numerical methods for both models.     

Excluding women from the technologies of the future? : A case study of the culture of computer science

In this article the authors show how the culture and ideas of a small male minority of students, the computer hackers, come to dominate computer science in the eyes of the female students. This minority culture is reinforced by the values and interests of the most powerful (male) groups in computer science, the male professors and teachers and their disciples, the dedicated students. In this way, a male-dominated and machine-fixated culture works to marginalize women     

利率市场化改革对于人民币汇率的影响

利率与汇率作为货币资金的对内价格和对外价格,二者具有统一的价值基础,并且相互影响,相互制约,共同在金融市场的资源配置中发挥着重要的作用。利率作为货币资金的对内价格,影响着居民及企业的支出和投资,利率的变化对整个金融市场乃至整个经济生活都有不容忽视的影响。汇率作为货币资金的对外价格,是开放经济条件下,外汇市场上的核心价格变量,受外汇市场、国际收支、跨国资产组合、外汇储备等因素影响。在一国宏观经济中,利率政策和汇率政策是货币政策的重要组成部分,也是一国宏观经济调控的主要政策手段。实际上,在宏观经济运行中,尤其是开放型经济,利率与汇率存在着复杂的关系,甚至有时还存在冲突。因此,对于利率与汇率在传导机制、价值基础、政策运用方面的相互关系的研究,将更有利于发挥货币政策的宏观调控效果。近年来,随着我国的改革开放逐步向纵深方向发展,利率的市场化改革也将进入攻坚阶段。当然,利率市场化改革将对整个金融体系及经济生活产生深远影响,但本文将研究重点放在利率与汇率的联动关系进而更好的研究利率市场化改革对于人民币汇率的影响。     

Lessons from Financial Crises: The Role of Clearinghouses

This article investigates the historical development of clearinghouses and their ability to deal with financial crises. The article first reviews the role of bank clearinghouses in the Panic of 1907, the final crisis of the National Banking Era that led to the founding of the Federal Reserve, and examines how the clearinghouses responded by issuing transactions media, despite legal obstacles, and providing coinsurance among the members. The article then traces the late nineteenth and twentieth century evolution of clearinghouses at futures exchanges to understand how they promote stability and withstand crises by mutualizing risks among members. The key feature of both bank and futures clearinghouses is the effective integration of the members during times of distress, illustrating how the private markets develop institutions and contracts to manage risk and respond to financial crises.     

Option clauses and the stability of a laisser faire monetary system

This article examines the potential of option clauses to stabilize a banking system with multiple banks of issue and convertible banknotes. It suggests that under laisser faire, banks will introduce option clauses and the public will be willing to accept them even when fully convertible notes are also available. This will be in the interest of both parties since option clauses protect banks against a liquidity crisis. The article then examines the historical experience of option clauses in Scotland in 1730–1765 and finds it to be broadly consistent with our prior expectations.     

A practitioner’s view of the future of futures studies

This article looks at the future of futures studies (FS) over the next 20 years from a practitioner’s viewpoint. It begins with favorable developments for FS in the organizational context. The main body covers how FS can take advantage of these more favorable developments. It then anticipates some key methodological and professional challenges and how FS might meet them. It concludes with a few comments about the prospects for a self-actualized FS.The single biggest challenge for FS over the next generation from my practitioner’s point-of-view is to get beyond the cyclicality of interest in the future and get FS firmly integrated into the organizational context. Our experience to date convinces me that we have earned “the right to practice,” and we must now focus the next few decades on sinking roots “inside”. The good news is that there are several developments suggesting that this is not just a preferable but also a probable future.     

Mediating Interests: The Accountancy Bodies' Responses to the McFarlane Report

There is now a considerable literature on the significance for accountants of their being accepted as a profession. The claim that they have regard to ‘the public interest’ in their activities is a central feature of the accountancy bodies’ claims to being accepted as a ‘profession’. This, they argue, distinguishes them from trade associations and trade unions. The claim is significant for both their economic and symbolic value. This paper examines the accountancy bodies’ claims by examining their responses to the 1992 publication of a discussion document The Future of Auditing by the Auditing Practices Board. Responses by four major professional bodies are analysed in detail. It is concluded that most of them do not attempt to redeem the claim to have regard to the public interest. Instead, they are mainly concerned to promote their members' private interests, frequently by advocating policy measures that will advance their own members' interests at the expense of those of other accountancy bodies. The significance of the contradiction between the transparency of this advocacy and the considerable effort expended in claiming to act in the public interest is discussed.     

贷款基础利率运行特征与影响

贷款基础利率（LPR）的推出是我国利率市场化的重要一步。LPR运行半年来,总体呈平稳单边上行走势,波动幅度较小,但与货币市场基准利率存在一定背离。文章分析指出,存贷款利率或额度管理、货币市场与信贷市场资金流通存在障碍是LPR与货币市场利率背离的主要原因;LPR缓慢上行主要受到银行存款贷款增速下滑的影响。文章从完善LPR报价模型、推广LPR在信贷产品中的运用等方面提出进一步发挥LPR基准作用的建议。     

Predicting House Prices Using Multiple Listings Data

It is often necessary to accurately predict the price of a house between sales. One method of predicting house values is to use data on the characteristics of the area's housing stock to estimate a hedonic regression, using ordinary least squares (OLS) as the statistical technique. The coefficients of this regression are then used to produce the predicted house prices. However, this procedure ignores a potentially large source of information regarding house prices—the correlations existing between the prices of neighboring houses. The purpose of this article is to show how these correlations can be incorporated when estimating regression coefficients and when predicting house prices. The practical difficulties inherent in using a technique called kriging to predict house prices are discussed. The article concludes with an example of the procedure using multiple listings data from Baltimore.     

The effects of ethnic culture and organizational culture on judgments of accountants

This study extends prior cross-cultural research by examining the effects of ethnic culture and organizational culture (Big 4 and non-Big 4 accounting firm affiliations) on the judgments of accountants in Fiji. The study also examines how interaction between ethnic culture and organizational culture influences the judgments of accountants. It examines the extent and the cause of differences between the judgments of Ethnic Fijian and Indo-Fijian accountants when interpreting and applying selected International Financial Reporting Standards (IFRSs). Consistent with their ethnic cultural values, the results show that Indo-Fijian accountants are generally more conservative in their judgments than their Ethnic Fijian counterparts. This study provides empirical evidence to support the view that both ethnic culture and organizational culture have a significant effect on the manner in which accountants within a country interpret uncertainty expressions contained in the IFRSs. The results also show that organizational culture has a greater effect on the judgments of accountants than ethnic culture. The results of this study provide important insights into the factors affecting the judgments of accountants within a country and raise interesting theoretical issues.     

The state of future in international relations

This paper elaborates the state of Future in International Relations from a comparative theoretical perspective with regard to the selected methodological tools of Futures Studies. It, first, looks into the development of International Relations and Futures Studies to point out, how their contextual, conceptual and epistemological similarities and dissimilarities emerged in due course. It, then, analyses to what extent the methodological differences between selected Futures Studies techniques (e.g. forecasting, trend analysis, Delphi, backcasting, causal layered analysis and integral futures approach) intersect with the conceptual and normative differences between contemporary theories of International Relations stemming from Realism, Liberalism, Constructivism, Post-structuralism, Normative Theory and Critical Theory. The paper characterizes the relevant futures techniques with reference to the theories of International Relations, and scrutinizes selected futuristic narratives of International Relations from a methodological perspective. It, then, elaborates how Futures Studies and International Relations can benefit from each other’s strengths in terms of their methodologies and assumptions. The article finally explores to what extent the promises of Futures Studies techniques conjure up a convergence between different theories of International Relations.