SSE/EFI Working Paper Series in Economics and Finance
A Note on the Pricing of Real Estate Index Linked Swaps
() and Eric Clapham
Abstract: In this paper we discuss the pricing of commercial real
estate index linked swaps (CREILS). This particular pricing problem has
been studied by Buttimer et al. (1997) in a previous paper.
that their results are only approximately correct and that the true
theoretical price of the swap is in fact equal to zero. This result is
shown to hold regardless of the specific model chosen for the index
process, the dividend process, and the interest rate term structure. We
provide an intuitive economic argument as well as a full mathematical proof
of our result.
In particular we show that the nonzero result in the
previous paper is due to two specific numerical approximations introduced
in that paper, and we discuss these approximation errors from a theoretical
as well as from a numerical point of view.
Keywords: Real estate; index linked swaps; arbitrage; (follow links to similar papers)
JEL-Codes: G13; G20; L85; (follow links to similar papers)
14 pages, February 13, 2002
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