An examination of uncovered interest rate parity in segmented international commodity markets

Article Abstract:

We examine the effect of segmented commodity markets on the relation between forward and future spot exchange in a dynamic economy. We calculate the slope coefficient in our theoretical economy from regressing exchange rate changes on forward premia. With reasonable parameter values, the slope coefficient is less than unity. However, even for extreme parameters the slope is not less than zero, as found in the data. A negative slope coefficient in a nominal version of the model requires the covariance between monetary shocks and relative output shocks to be significantly negative, in contrast to the covariance in the data. (Reprinted by permission of the publisher.)

International aspects, Market segmentation, Commodity exchanges

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Pricing contingent claims under interest rate and asset price risk

Article Abstract:

This paper presents a general framework for pricing contingent claims under interest rate and asset price uncertainty. The framework extends Ho and Lee's (1986) valuation framework by allowing not only future interest rates but also future asset prices to depend on the current term structure of interest rates. The approach is shown to provide risk-neutral valuation relationships that are consistent with the initial term structure of interest rates and can be applied to valuation of a broad class of assets including stock options, convertible bonds, and junk bonds. (Reprinted by permission of the publisher.)

Valuation, Asset-backed securities, Asset backed securities

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