scholarly journals Adjustment to Risk Free Rate/ Violation of Put-Call Parity

2019 ◽  
Vol 6 (6) ◽  
pp. 80
Author(s):  
Saied Simozar
Keyword(s):  
Interest Rates ◽  
Present Value ◽  
Discount Function ◽  
Forward Price ◽  
Zero Correlation ◽  
Forward Contract ◽  
Risk Free Rate ◽  
Free Rate

The present value of a forward contract for any asset that does not pay a dividend is calculated by discounting its forward price by the risk-free rate. We show that the discount function for assets that have a non-zero correlation with interest rates, has to be adjusted to account for the correlation between the asset and interest rates. Put-Call parity is also violated and needs to be adjusted as well for such assets. It is shown that the risk-free rate is asset dependent. The adjustment to the price is small for short dated forwards, but increases quadratically with time to maturity.

scholarly journals CONNECTING THEORY AND EMPIRICS FOR ANIMAL SPIRITS, RETURNS AND INTEREST RATES: A CLARIFICATION OF “RISK-FREE RATES AND ANIMAL SPIRITS IN FINANCIAL MARKETS”

2017 ◽  
Vol 12 (01) ◽  
pp. 1750002 ◽  
Author(s):  
JUKKA ILOMÄKI
Keyword(s):  
Financial Markets ◽  
Interest Rates ◽  
Expected Returns ◽  
Animal Spirits ◽  
Empirical Results ◽  
Upper Limit ◽  
Risk Free Rate ◽  
Free Rate

I clarify and combine the results of Ilomäki (2016a) and Ilomäki (2016b) and find several interesting conclusions. First, the effect of the animal spirits component to the expected returns of investors depends on the risk-free rate. Second, there must be an upper limit for the risk-free rate, where the component that reduces the expected returns of informed investors in Ilomäki (2016a) disappears. Third, the empirical results of Ilomäki (2016b) indicates that the break-even level is as low as 3%.

scholarly journals Preferred and Non-Preferred Creditors

2021 ◽  
Author(s):  
Tito Cordella ◽  
Andrew Powell
Keyword(s):  
Interest Rates ◽  
Financial Institutions ◽  
Low Cost ◽  
International Financial Institutions ◽  
Risk Free Rate ◽  
Free Rate

International financial institutions (IFIs) generally enjoy preferred creditors treatment (PCT). Although PCT rarely appears in legal contracts, when sovereigns restructure bilateral or commercial debts, they normally pay IFIs in full. This paper presents a model where a creditor, such as an IFI, that can commit to lend limited amounts at the risk-free rate and can refrain from lending into arrears is always repaid and adds value. The analysis suggests that IFIs and market lenders can both enhance welfare, even if banning commercial borrowing can sometimes be optimal. To maintain their status, preferred lenders should offer low cost financing in volumes that are consistent with countries' incentives to repay even in bad states. This suggests such lenders should not differentiate lending interest rates according to risk and should not participate in the restructuring of commercial debt.

scholarly journals How Much Do Investors Care About Macroeconomic Risk? Evidence from Scheduled Economic Announcements

2013 ◽  
Vol 48 (2) ◽  
pp. 343-375 ◽  
Author(s):  
Pavel Savor ◽  
Mungo Wilson
Keyword(s):  
Interest Rates ◽  
Risk Premium ◽  
Asset Returns ◽  
Precautionary Saving ◽  
Macroeconomic News ◽  
Macroeconomic Risk ◽  
Equity Risk ◽  
Sharpe Ratios ◽  
Risk Free Rate ◽  
Free Rate

AbstractStock market average returns and Sharpe ratios are significantly higher on days when important macroeconomic news about inflation, unemployment, or interest rates is scheduled for announcement. The average announcement-day excess return from 1958 to 2009 is 11.4 basis points (bp) versus 1.1 bp for all the other days, suggesting that over 60% of the cumulative annual equity risk premium is earned on announcement days. The Sharpe ratio is 10 times higher. In contrast, the risk-free rate is detectably lower on announcement days, consistent with a precautionary saving motive. Our results demonstrate a trade-off between macroeconomic risk and asset returns, and provide an estimate of the premium investors demand to bear this risk.

scholarly journals Habit Persistence, Asset Returns, and the Business Cycle

2001 ◽  
Vol 91 (1) ◽  
pp. 149-166 ◽  
Author(s):  
Michele Boldrin ◽  
Lawrence J Christiano ◽  
Jonas D. M Fisher
Keyword(s):  
Business Cycle ◽  
Interest Rates ◽  
Substantial Improvement ◽  
Output Growth ◽  
Habit Persistence ◽  
Business Cycle Model ◽  
The Business Cycle ◽  
Risk Free Rate ◽  
Mean Risk ◽  
Free Rate

Two modifications are introduced into the standard real-business-cycle model: habit preferences and a two-sector technology with limited intersectoral factor mobility. The model is consistent with the observed mean risk-free rate, equity premium, and Sharpe ratio on equity. In addition, its business-cycle implications represent a substantial improvement over the standard model. It accounts for persistence in output, comovement of employment across different sectors over the business cycle, the evidence of “excess sensitivity” of consumption growth to output growth, and the “inverted leading-indicator property of interest rates,” that interest rates are negatively correlated with future output. (JEL D10, E10, E20, G12)

scholarly journals Analisis Discounted Cash Flow (DCF) dalam Investasi Tambang dan Kelayakan Ekonomi pada Ekstraksi Timah dengan Menggunakan Teknologi Klorinasi Basah

2021 ◽  
Vol 9 (1) ◽  
Author(s):  
Noor Fauzi Isniarno ◽  
Ilham Rifki Nurfajar ◽  
Maulana Okta Saputra
Keyword(s):  
Cash Flow ◽  
Net Present Value ◽  
Cost Of Equity ◽  
Present Value ◽  
Discounted Cash Flow ◽  
Market Return ◽  
Internal Rate ◽  
The World ◽  
Risk Free Rate ◽  
Free Rate

Abstract. Indonesian tin production covers about 30% of the demand for tin commodity in the world. The high level of tin demand in the world and the limited reserves of natural resources for the commodity of tin, encourage more effective and efficient utilization. So it is necessary to do a lot of research from upstream from exploration to downstream to metallurgical processes as well as improving the technology of all elements to be more effective and efficient. In addition, research must be carried out in terms of investment and economic feasibility, so that the availability of tin commodity reserves can be carried out to improve the nation's economy. Many methods are used in modeling the projected Net Present Value (NPV) to determine its economic viability by using Discounted Cash Flow (DCF). The investment cost for tin extraction using the wet chlorination method is USD. 1,181,623 for the pre-operational phase, USD. 2,084,219 for the engineering phase and USD. 3,602,736 for investment in operational ownership and workers' wages. Investment analysis using the Discounted Cash Flow (DCF) method assuming a cost of equity of 11.37%, a risk free rate of 7.89%, 100% Equity Beta, 11.37% market return and a minimum IRR of 10. 37%. The fund invested in this tin extraction is USD. 6,868,578 in 15 years, with an NPV of USD. -18,943,455, so the Internal Rate Return (IRR) is 0.029% with a minimum IRR of 9.97Keywords: Tin, Discounted Cash Flow, InvestmentAbstrak. Produksi timah indonesia mencakup sekitar 30% dari permintaan komoditi timah di dunia. Besarnya tingkat permintaan timah di dunia ini serta keterbatasan cadangan sumberdaya alam komoditi timah, mendorong pemanfaatan harus lebih efektif dan efisien. Sehingga perlu banyak dilakukan penelitian dari hulu mulai dari ekplorasi hingga ke hilir sampai proses metalurgi serta meningkatkan teknologi dari semua unsur untuk dapat lebih efektif an efisien tersebut. Selain itu juga, harus dilakukan penelitian dalam hal investasi dan kelayakan ekonomi, sehingga ketersediaan cadangan akan komoditi timah dapat berjalan untuk meningkatkan perekonomian bangsa. Banyak hal metode yang dilakukan dalam memodelkan Net Present Value (NPV) yang diproyeksikan untuk mengetahui kelayakan ekonominya dengan menggunakan Discounted Cash Flow (DCF). Biaya investasi ektraksi timah menggunakan metode klorinasi basah adalah USD. 1.181.623 untuk tahap pra operasional, USD. 2.084.219 untuk tahap engineering dan USD. 3.602.736 untuk investasi kepemilikan operasional dan upah pekerja. Analisis investasi dengan menggunakan metode Discounted Cash Flow (DCF) dengan asumsi cost of equity sebesar 11,37%, risk free rate sebesar 7,89%, Equity Beta sebesar 100%, Market return sebesar 11,37% dan IRR minimum sebesar 10,37%. Dana yang diinvestasikan dalam ektraksi timah ini adalah USD. 6.868.578 dalam 15 tahun, dengan hasil NPV sebesar USD. -18.943.455, sehingga Internal Rate Return (IRR) sebesar 0,029% dengan IRR minimum sebesar 9,97Kata Kunci : Timah, Discounted Cash Flow, Investasi 

scholarly journals Factors Influencing IPO Underpricing in Poland

2020 ◽  
Vol 4 (349) ◽  
pp. 7-21
Author(s):  
Przemysław Pomykalski ◽  
Piotr Filipiak
Keyword(s):  
Interest Rates ◽  
Initial Public Offering ◽  
Stock Exchange ◽  
Recent Decade ◽  
Ipo Underpricing ◽  
Warsaw Stock Exchange ◽  
Low Interest Rates ◽  
Risk Free Rate ◽  
Public Offering ◽  
Free Rate

We review the theory and evidence on IPO activity and underpricing focusing on the Warsaw Stock Exchange. Although the topic has been under investigation in the past, we believe that the recent decade of low interest rates deserves inquiry. We research the extent of underpricing during this period and further conclude that three factors had a statistically significant influence on initial public offering underpricing during this period: the year of IPO, risk-free rate and WIG close value.

Corporate Money Demand

2020 ◽  
Author(s):  
Xiaodan Gao ◽  
Toni M Whited ◽  
Na Zhang
Keyword(s):  
Interest Rates ◽  
Money Demand ◽  
Firm Level ◽  
Nominal Interest Rates ◽  
Level Data ◽  
Low Interest Rates ◽  
Risk Free Rate ◽  
Risky Debt ◽  
Free Rate ◽  
Cash Demand

Abstract We document a hump-shaped relation between corporate cash and both real and nominal interest rates in both aggregate and firm-level data. We rationalize this result in a model where firms finance investment with cash and risky debt. The risky rate rises endogenously with the risk-free rate, spurring precautionary cash demand. Simultaneously, foregone interest lowers cash demand. The first mechanism dominates at low interest rates, and the second at high interest rates. The model matches several data moments and reproduces a nonmonotonic cash–interest relation. This nonmonotonicity implies that interest rates are unlikely to be behind the recent rise in corporate cash.

scholarly journals International Real Estate Review

2021 ◽  
Vol 24 (1) ◽  
pp. 113-138
Author(s):  
Shizhen Wang ◽  
◽  
David Hartzell ◽  
Keyword(s):  
Hong Kong ◽  
Real Estate ◽  
Interest Rates ◽  
Real Estate Market ◽  
Housing Affordability ◽  
Commercial Real Estate ◽  
Price Ratio ◽  
Distributed Lag ◽  
Risk Free Rate ◽  
Free Rate

We apply the dynamic Gordon growth model to the Hong Kong real estate market to analyze quarterly data on four kinds of real estate—housing, office, retail, and factory properties—from 1999 to 2020. We find that factories have the highest total returns among the four types of real estate, and also a larger Sharpe ratio. The total returns of these four kinds of real estate are highly correlated. The results of an autoregressive distributed lag model show that the gross domestic product growth rate is the key determinant of real estate returns, while changes in foreign direct investment also influence housing and retail returns. The expected value of the risk-free rate is the key factor that determines the rent-price ratio. The decline in the risk-free rate in Hong Kong is the main reason that the real estate price-rent ratio has increased from 20 to 40 in the last twenty years. Our research represents an early contribution that compares the performance of housing and commercial real estate at the city level, with both types of real estate having similar determinants. Finally, we find that the fall in risk-free interest rates worsens housing affordability in Hong Kong.

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