This case provides an opportunity to initiate and implement clear expectations theory of interest rates. It also reveals the basis price of the option, considering refinancing option embedded in long-term mortgage alternative. Because of the refinancing option, the spread charged by the bank for long-term mortgage is too low, which suggests that the arbitrage opportunities available through the construction of "home" interest rate swap.
This Darden study. "Hide
by Kenneth Eades, S. Brooks Marshall Source: Darden School of Business 7 pages. Publication Date: February 19, 1996. Prod. #: UV0498-PDF-ENG
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