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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26641
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| Title: | Pascal Spreading of Short-Term Interest Rate Contracts |
| Authors: | Merrick, John J. Jr |
| Issue Date: | Jun-2000 |
| Series/Report no.: | FIN-00-012 |
| Abstract: | This paper examines the spreading and pricing of short-term interest
rate futures contracts and shows how traditional types of calendar
spread positions can emerge as explicit arbitrage solutions. A specific
set of intuitive spreading structures – “Pascal’s
Spreading Triangle” – arises when the underlying daily risk
factors are identified as the stochastic coefficients of a high-ordered
polynomial approximation to the yield curve. No empirically estimated
hedge ratios are required for these arbitrage strategies. Application of
this Pascal Spreads framework to pricing and trading the LIFFE’s
Short Sterling deposit futures market over the 1989 to 1998 sample
period reveals that the LIFFE’s Short Sterling arbitrage
sector’s efficiency has improved markedly over time. The
improvement over the decade coincides with the dramatic declines in
futures trading transactions costs. As a byproduct, the framework
extracts and measures the quantitative impact of the Y2K millennium-turn
pricing distortion on the December 1999 Short Sterling futures contract. |
| URI: | http://hdl.handle.net/2451/26641 |
| Appears in Collections: | Finance Working Papers
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