The Anatomy of the Ten-Year Floating-Rate Retail JGB-An Approach Based on the FRA Market Model-
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概要
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The Ministry of the Treasury began to issue ten-year floating rate JGBs for retail purposes in March 2003, as part of the establishment of a funding diversification policy. Many security firms advertised these securities by means of recommendation letters that detailed the attractive characteristics of these products. However, to my knowledge, no research has yet evaluated the value of these products by means of an appropriate valuation model. The aim of this paper was to quantitatively clarify the attractive qualities of the ten-year floating-rate retail JGB, by means of a comparison with the 15-year floating-rate wholesale JGB, and with other imaginary products. In the course of this study, I make use of the following powerful valuation tools: (1) a convexity correction through a numeraire change (Jamshidian, F.), (2) long-jump and very-long-jump approaches (Rebonato, R.), and (3) Kloeden and Platen's Runge-Kutta-like weak approximation. My major empirical findings are comprised of the following three results. First, the value of the ten-year floating-rate retail JGB is generally larger than that of the 15-year floating-rate wholesale JGB. Second, the price sensitivity of the former, with respect to the αBP that is subtracted from the base rate, is not monotonically decreasing. Third, the impetus of the second result is the trade-off, resulting from an increase in αBP, between the decrease in the projected future cash flow and the increase in the intrinsic value of the embedded American put option.
- 2006-01-31