IDEAS home Printed from https://ideas.repec.org/p/isu/genstf/1992010108000011331.html
   My bibliography  Save this paper

The application of financial futures and options to home mortgages: An "optional" comparison of the ARM-FRM rate differential

Author

Listed:
  • Maysami, Ramin

Abstract

The interest rate risk associated with owning a portfolio of fixed rate mortgages may be hedged away through offering adjustable rate mortgages. Financial institution, however, have other hedging choices available which may better match their intentions--reducing the risk of rising interest rates and falling values without eliminating the benefits of rising values in response to declining rates. Involvement in option market strategies may provide such an opportunity;This dissertation examines the comparative benefits of hedging a portfolio of FRMs with Treasury bond futures contracts and "covering" such portfolios with various option on T-bond futures contracts. The "best" hedging strategy will be identified as the purchase of financial futures put options;Further, since the basic pricing principles are the same for the two mortgage types, it appears that the difference between the two mortgages, from the financial institutions' point of view, is the extra cost of hedging the FRM. The efficient market hypothesis, then, suggests that the difference between the fixed and adjustable mortgage rates should not be more than the cost of hedging the FRM portfolio with a long position in put options on financial futures. This hypothesis is tested in the second part of this dissertation.

Suggested Citation

  • Maysami, Ramin, 1992. "The application of financial futures and options to home mortgages: An "optional" comparison of the ARM-FRM rate differential," ISU General Staff Papers 1992010108000011331, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genstf:1992010108000011331
    as

    Download full text from publisher

    File URL: https://dr.lib.iastate.edu/server/api/core/bitstreams/57f2f38a-3c73-4095-b1eb-f8733126fd81/content
    Download Restriction: no
    ---><---

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:isu:genstf:1992010108000011331. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Curtis Balmer (email available below). General contact details of provider: https://edirc.repec.org/data/deiasus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.