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This paper examines the Argentine experience with GDP-indexed warrants in order to gauge the existence of a novelty premium on new financial instruments. It develops a Monte Carlo pricing exercise to calculate the expected net present value of payments, on the basis of various forecast assumptions. The results show that the residual premium paid by these warrants over standard bonds declined significantly by about 600 basis points between December 2005 and July 2007. This suggests that financial innovation may be associated with premia, which decay reasonably fast.
Inflation-indexed bonds --- Econometric models. --- Granny bonds --- Index bonds --- Index-linked bonds --- Indexed bonds --- Inflation-linked bonds --- Inflation-protection bonds --- Bonds --- Banks and Banking --- Foreign Exchange --- Inflation --- Investments: General --- Money and Monetary Policy --- Monetary Systems --- Standards --- Regimes --- Government and the Monetary System --- Payment Systems --- Price Level --- Deflation --- General Financial Markets: General (includes Measurement and Data) --- Interest Rates: Determination, Term Structure, and Effects --- Monetary economics --- Macroeconomics --- Investment & securities --- Finance --- Currency --- Foreign exchange --- Currencies --- Securities --- Discount rates --- Exchange rates --- Money --- Prices --- Financial instruments --- Discount --- Argentina
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