# Tag Info

2

There is not a single 'interest-rate' to reduce, there are various interest rates in play. The central bank mandate is usually to control CPI or a similar measure of inflation (e.g. Bank of England's 2% inflation target for GBP). There are various tools for them to do this, including QE and setting the central bank rate. However, at the moment, the central ...

0

The traditional tool of central banks is the direct control of interest rates. The interest rate being controlled is usually the short dated interbank rate ( federal funds rate in the US). If, in a severe recession, the short rates have already been reduced to zero, we have seen central banks turn to QE. Under QE, the central bank typically buys ...

2

Put it simply, the interest rate depends on the forces of demand and supply of money. When the Fed buy bond, it increases the money supply into the economy. To induce the people to borrow more money bank reduces their own interest rate, otherwise, people won't have any incentives to borrow more. The interest rate is reduce to such level again equilibrium is ...

1

Good question. to make it short: same Aim, but just different ways to fullfill a goal. if you (or Lender of last resort) create(s) an exogenous shock by lowering directly rates, the cost of interbank money is de facto reduced and you expect a positive externality in real economy by providing more loans towards economic agents (companies, etc.). However with ...

0

To say a curve is arbitrage-free, you need to pick an arbitrage path; a series of trades which, when followed, yield a net profit without creating exposure. We neglect counterparty exposure here, since you are presumably using market-neutral rates. One arbitrage is to buy a swap from your curve, and sell at the market price. This is a test of your curve ...

0

This says that if rates are deterministic, the spot rate follows the forward rates that are initially observed. Makes sense.

0

You are asking about the term structure of lognormal implied volatilities for European swaptions, which is a two dimensional function (expiration and tenor). First expiration: typically (but not always), implied volatilities are increasing in the 0 to 6 month sector, because the immediate future is often more predictable than the medium term. At some ...

1

from a practitioner perspective, i can say there's no such thing as a 0 year swap (obviously). The shortest tenor that you could trade would be a contract on one month LIBOR or more likely 3 month LIBOR. Then the instrument you are asking about is a 5 year expiration caplet (payoff in 5 years = max (0, LIBOR- strike).)

1

Since the interest rate is deterministic, for $t< u \le T$, \begin{align*} f(t, u) &= -\frac{\partial}{\partial u} \ln P(t, u)\\ &=-\frac{\partial}{\partial u} \ln \left(E\left(\exp\left(-\int_t^u r(s)\, ds \right) \mid \mathcal{F}_t\right) \right)\\ &=-\frac{\partial}{\partial u} \ln \left(\exp\left(-\int_t^u r(s)\, ds\right) \right)\\ ...

2

As @Alex C mentioned, they are all equivalent. Specifically, 1 and 3 are the exact same thing. (1 is missing an n - unless it's a one year bond). 2 is the intuitively the equivalent of putting a smaller amount of money today in the bank (whatever rf inst. guarantees the $i$ rate of interest) to have same payments as the bond in the future. Since this ...

1

Call option gives the exercise strategy, but it doesn't actually tell you anything about the underlying. It could be a stock, a LIBOR interest rate, a bond or any tradable asset. The simplest call option would be an equity call option, where the underlying is a stock. In a caplet, the underlying is the forward interest rate (eg: LIBOR), you would exercise a ...

1

A caplet is a call, as the payoff is given by $(L-K)^+$, where $L$ is the libor rate for a given calculation period and $K$ is the pre-agreed rate. However, in practice, the volatilities for a strip of caps are usually provided, and then a bootstrapping algorithm is needed to back out the volatility for each caplet.

Top 50 recent answers are included