SFB 303 Discussion Paper No. B - 119
Author: Klein, Martin, and Sigrid Müller
Title: ECU Interest Rates and ECU Basket Adjustments: An Arbitrage Pricing
Approach
Abstract: The paper considers the arbitrage pricing of bonds and the
determination of interest rates in the European Currency Unit (ECU) in
situations of impending ECU basket adjustments. These adjustments disrupt
the markets for private ECU assets with a lead of several months. The
approach of the paper is based on the observation that the ECU is a
derivative asset so that in the absence of transaction costs prices of ECU
denominated assets should be determined by the prices of the existing member
currency assets and the member currencies' exchange rates. Using the
technical apparatus of arbitrage pricing theory it is shown how the
fundamental arbitrage pricing relationships implied by the derivative
character of the ECU have to be adjusted in order to be applicable during
periods of ECU basket adjustments.
Keywords:
JEL-Classification-Number:
Creation-Date: February 1989
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