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The Ancient Roots of Modern Financial Innovation: The Early History of Regulatory Arbitrage

24 Pages Posted: 16 Jun 2004 Last revised: 27 Jun 2009

Michael S. Knoll

University of Pennsylvania Law School; University of Pennsylvania Wharton School -- Real Estate Department

Abstract

Recent years have seen an explosion of financial innovation. Much of this innovation seeks to exploit inconsistencies in the regulatory environment, and one of the most popular techniques for doing so uses put-call parity. Nonetheless, regulatory arbitrage using put-call parity is not a new phenomenon, as is frequently suggested. This Essay traces the use of put-call parity to avoid the usury prohibition back to Ancient Israel. It also describes the important role that put-call parity played in developing the equity of redemption, the defining characteristic of a modern mortgage, in Medieval England. In addition, this Essay describes how Muslims living in the West are using mortgage substitutes based on put-call parity to avoid Islam's prohibition on paying interest.

Keywords: financial innovation, put-call parity, regulatory arbitrage, financial history, usury

JEL Classification: G18, G21, G29, K42, N20, O15

Suggested Citation

Knoll, Michael S., The Ancient Roots of Modern Financial Innovation: The Early History of Regulatory Arbitrage. Oregon Law Review, Vol. 87, p. 93, 2008; U of Penn, Inst for Law & Econ Research Paper No. 04-11. Available at SSRN: https://ssrn.com/abstract=555972 or http://dx.doi.org/10.2139/ssrn.555972

Michael S. Knoll (Contact Author)

University of Pennsylvania Wharton School -- Real Estate Department ( email )

Philadelphia, PA 19104-6330
United States

University of Pennsylvania Law School ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States
215-898-6190 (Phone)
215-573-2025 (Fax)

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