By arbitrage this riskless payoff should equal the payoff to investing the cost of the commodity in a riskless bond, i.e., the spot interest rate
for maturity [tau], [Y.sub.t]([tau]):
"Regardless of current spot interest rate
levels, we recommend that frozen pension plan sponsors engage in analyzing their pension risk transfer options and costs as part of an overall pension risk management strategy."
Exploiting this condition, Vasicek obtains a bond pricing formula that expresses the price of bonds of various maturities as a function of the spot interest rate
, the market price of risk, and other model parameters.
Furthermore, our study extends Amin and Morton (1994) and Klassen, Dressien and Pelsser (1999) by considering that the volatility structure depends on the level of the spot interest rate
Having analyzed the length of the relationship between lagged forward rates and the spot interest rate
, we can explore the direction of the influence on the relationship between the Treasury and swap yield curves.
The interest rate with the shortest maturity is commonly called the spot interest rate
as to eliminate any arbitrage profit with spot interest rates
Caption: Figure 5: Swiss Government Bonds: Spot interest rates
A term structure of spot interest rates
and their component forward interest rates contain the same information, but expressing rates in forward terms provides a clearer view of the impact of different factors at different horizons.
The data set used in the estimations is composed by the monthly spot interest rates
and the corresponding instantaneous forward rates of the McCulloch U.S.
The term structure of interest rates or zero-coupon yield curve characterizes relation between spot interest rates
in the economy and the term to maturity of default-free fixed income securities in the market.
In this paper, we study the dynamic relationship of interest rate based-survey forecasts and spot interest rates
. Our results suggest that these market expectations contain useful information regarding the future evolution of interest rates and also that they may be used to gauge Central Bank credibility.