Stripping of Real Estate-Indexed Swaps and Forward Term Structure: Interest and Computational Method

30 Pages Posted: 3 Feb 2015

See all articles by Pierre-Arnaud Henri Drouhin

Pierre-Arnaud Henri Drouhin

Université Paris Dauphine

Arnaud Simon

Université Paris Dauphine - Centre de Recherches sur la Gestion (CEREG)

Date Written: February 2, 2011

Abstract

The recent growth of the real estate indexed derivatives market calls for a greater attention to the pricing of these products. This paper contributes to the literature providing a simple connection between instruments such as year on year zero coupon swap or real estate indexed forwards. A closed-form formula for property swaps based on indexed forwards is established and special attention is paid to the convexity adjustment problem. Finally, we introduce a bootstrap method to compute the implied forward term structure using the swap prices. This simple framework enables market practitioners to obtain valuable information from the derivative market for their investment decisions and their risk management. Indeed, forward prices are generally an advanced indicator of future spot prices.

Keywords: swap, forward, term structure, diffusion process, change of probability measure.

Suggested Citation

Drouhin, Pierre-Arnaud Henri and Simon, Arnaud, Stripping of Real Estate-Indexed Swaps and Forward Term Structure: Interest and Computational Method (February 2, 2011). Available at SSRN: https://ssrn.com/abstract=2559215 or http://dx.doi.org/10.2139/ssrn.2559215

Pierre-Arnaud Henri Drouhin (Contact Author)

Université Paris Dauphine ( email )

223 Rue Saint-Honore
Paris, 75775
France

Arnaud Simon

Université Paris Dauphine - Centre de Recherches sur la Gestion (CEREG) ( email )

Paris Dauphine University
Place de Lattre de Tassigny
Paris, 75775
France

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