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<p>Structured products are investment vehicles that combine basic financial instruments to provide private investors with packaged solutions to more advanced investment strategies in financial markets.</p><p>This paper investigates the pricing of 22 index-linked notes examined during their full life cycles between January 12, 2005 and January 17, 2007. The selected products constitute some 40% of the structured products issued by Swedbank in 2005, which at the time of the study is the second largest issuer of structured products to private investors in Sweden. Quoted prices on secondary markets are compared with duplication strategies using exchange traded options in order to calculate price differences.</p><p>The pricing results show that quoted prices deviate very little from their theoretical values in secondary markets. The price deviations are surprisingly low in an international comparison. Some indications have been found that the market maker is able to influence prices on secondary market by orienting the pricing towards the relative life cycle and moneyness of the structured products.</p><p>The importance of patterns in price deviations can, however, be questioned since the absolute level of pricing errors is low. There is little evidence to suspect that the issuer, Swedbank, systematically quotes prices that are not in line with their theoretical values. Sophisticated investors are thus likely to be able to judge the attractiveness of the structured product issue by comparing the transaction costs of the instruments in a duplication strategy with the transaction costs of the structured product. The author welcomes further research that includes multiple issuers to determine whether these findings apply for the Swedish market as a whole.</p>

The long-term external financing of a corporation is satisfied through the bond market where issues of index-linked bonds, which are discussed in this thesis, is one alternative. (Finnerty&amp;Emery 2001) An index- linked bond is a debt instrument where the investor is guaranteed the principal and premium amount in real terms. As the bonds cash flows are indexed to the inflation this implies that the issuer of an index-linked bond assumes an inflation risk. Purpose: The purpose of this thesis is to describe and examine corporate motives for choosing index-linked bonds as way of financing their business. Realization: Primary data was collected through interviews with corporate issuers of non-swapped index-linked bonds. Results: From our research it has been acknowledged that both internal and external factors determine the decision to issue index-linked bonds. The most important internal reason for the issuance was that this type of financing implies matching advantages, which helps lowering the companies’ risks. This is achieved by balancing the size and time of the cash inflows with the cash out- flows. Of the external factors we found that it is primary the financing cost that is of interest. The cost savings are primarily achieved because of the lower liquidity premium demanded when using index-linked bonds as a way of financing the business. We believe that this depends partly on the character of the investors and on market imperfections.

<p>The long-term external financing of a corporation is satisfied through the bond market where issues of index-linked bonds, which are discussed in this thesis, is one alternative. (Finnerty&Emery 2001) An index- linked bond is a debt instrument where the investor is guaranteed the principal and premium amount in real terms. As the bonds cash flows are indexed to the inflation this implies that the issuer of an index-linked bond assumes an inflation risk. Purpose: The purpose of this thesis is to describe and examine corporate motives for choosing index-linked bonds as way of financing their business. Realization: Primary data was collected through interviews with corporate issuers of non-swapped index-linked bonds. Results: From our research it has been acknowledged that both internal and external factors determine the decision to issue index-linked bonds. The most important internal reason for the issuance was that this type of financing implies matching advantages, which helps lowering the companies’ risks. This is achieved by balancing the size and time of the cash inflows with the cash out- flows. Of the external factors we found that it is primary the financing cost that is of interest. The cost savings are primarily achieved because of the lower liquidity premium demanded when using index-linked bonds as a way of financing the business. We believe that this depends partly on the character of the investors and on market imperfections.</p>

Structured products are investment vehicles that combine basic financial instruments to provide private investors with packaged solutions to more advanced investment strategies in financial markets. This paper investigates the pricing of 22 index-linked notes examined during their full life cycles between January 12, 2005 and January 17, 2007. The selected products constitute some 40% of the structured products issued by Swedbank in 2005, which at the time of the study is the second largest issuer of structured products to private investors in Sweden. Quoted prices on secondary markets are compared with duplication strategies using exchange traded options in order to calculate price differences. The pricing results show that quoted prices deviate very little from their theoretical values in secondary markets. The price deviations are surprisingly low in an international comparison. Some indications have been found that the market maker is able to influence prices on secondary market by orienting the pricing towards the relative life cycle and moneyness of the structured products. The importance of patterns in price deviations can, however, be questioned since the absolute level of pricing errors is low. There is little evidence to suspect that the issuer, Swedbank, systematically quotes prices that are not in line with their theoretical values. Sophisticated investors are thus likely to be able to judge the attractiveness of the structured product issue by comparing the transaction costs of the instruments in a duplication strategy with the transaction costs of the structured product. The author welcomes further research that includes multiple issuers to determine whether these findings apply for the Swedish market as a whole.

<p>The Fisher Equation suggests that the spread between nominal and real interest rates is equal to the inflation expectations. In Sweden, where both nominal and inflation linked bonds exist the fisher equation implies that the yield spread could provide investors and policymakers with important information about markets inflation expectations. The aim of this thesis is therefore to estimate whether the yield spread between Swedish nominal and real interest rates - widely referred to as the Breakeven Inflation (BEI) - is a market based measure of inflation expectations. A sample based on historical bond prices between year 2000 and 2007 is used and adjusted for 3 distortions: i) The mismatch in cash flow structure arising from different bond characteristics. ii) The inflation indexation and bond finance implications (carry). iii) The seasonality in Consumer Price Index (CPI). In the absence of “true” inflation expectations, the benchmark used for the evaluation and comparison of the unadjusted and adjusted BEI series is the survey based, Prospera Money Market Players inflationary expectations, i.e. professional forecasters. The evaluation uses two statistical measures to estimate the errors, the Root Mean Squared Error (RMSE) to estimate the size of the forecast error and the Mean Error (ME) to measure the bias or the tendency for the forecast error to point in a particular direction. The general conclusion of the study is that both the unadjusted and the adjusted BEI series have improved significantly throughout the sample period as predictors of inflation expectations.</p><p>Further, in the first half of the sample, the MEs show that the BEI tends to underestimate inflation expectations, while in the second part of the sample the direction of the errors are less univocal. However, the carry adjusted and in some extent the carry and seasonality adjusted BEI seem to improve the BEI somewhat, although the conclusions are not very convincing. When using BEI to measure inflation expectations the conclusions should also be balanced against the possible bias associated with survey based expectations.</p>

The Fisher Equation suggests that the spread between nominal and real interest rates is equal to the inflation expectations. In Sweden, where both nominal and inflation linked bonds exist the fisher equation implies that the yield spread could provide investors and policymakers with important information about markets inflation expectations. The aim of this thesis is therefore to estimate whether the yield spread between Swedish nominal and real interest rates - widely referred to as the Breakeven Inflation (BEI) - is a market based measure of inflation expectations. A sample based on historical bond prices between year 2000 and 2007 is used and adjusted for 3 distortions: i) The mismatch in cash flow structure arising from different bond characteristics. ii) The inflation indexation and bond finance implications (carry). iii) The seasonality in Consumer Price Index (CPI). In the absence of “true” inflation expectations, the benchmark used for the evaluation and comparison of the unadjusted and adjusted BEI series is the survey based, Prospera Money Market Players inflationary expectations, i.e. professional forecasters. The evaluation uses two statistical measures to estimate the errors, the Root Mean Squared Error (RMSE) to estimate the size of the forecast error and the Mean Error (ME) to measure the bias or the tendency for the forecast error to point in a particular direction. The general conclusion of the study is that both the unadjusted and the adjusted BEI series have improved significantly throughout the sample period as predictors of inflation expectations. Further, in the first half of the sample, the MEs show that the BEI tends to underestimate inflation expectations, while in the second part of the sample the direction of the errors are less univocal. However, the carry adjusted and in some extent the carry and seasonality adjusted BEI seem to improve the BEI somewhat, although the conclusions are not very convincing. When using BEI to measure inflation expectations the conclusions should also be balanced against the possible bias associated with survey based expectations.

<p>Diss. Stockholm : Handelshögskolan, 2007 viii, s. [1]-4: sammanfattning, s. [7]-104: 3 uppsatser</p>

Households generally have little or no possibility to unload their real estate risk, which constitutes a large part of  their total portfolio risk. The aim of this study is to analyze a way for households to unload this risk through a socalled index-linked mortgage financed by a fund. The study examines how such a mortgage could be structured, and how it will affect  he bank, the borrower and the fund investor compared to a conventional mortgage. The ominal loan value and therefore also the interest payments of the studied index-linked  ortgage will vary according to the HOX Flats Stockholm Index. Through linear optimization, the structure is optimized from a borrower’s perspective but is subject to a set of constraints on the bank’s and the fund’s profitability and risk levels. The optimal structure is tested through a scenario analysis for different outcomes of apartment price developments and also  hrough a sensitivity analysis to test the effect of shifting conventional mortgage rates. The esults show that the interest rate payment burden will consistently be lower for the index-linked mortgage than for the conventional mortgage. The borrower is insured against house price drops but have to give up some of the upside potential on the property investment if house prices increase. The fund gets a satisfactory payoff in relation to the real estate  arket movement while it is somewhat protected when house prices decline. The bank issuing the mortgages will always experience a profit, but the conventional mortgage is more profitable  or negative index scenarios. Furthermore, the probability of default decreases for the index- inked mortgage holder when prices drop as the loan to value ratio (LTV) always remains  elow 100 percent for index decreases up to 40 percent. The structure is appropriate for  owincome households who will have difficulties paying back the loan when apartment prices  rops. This study contributes to theory in hedging of real estate risk, mortgage risk and  inancial innovation. / Hushåll har generellt få möjligheter att försäkra sig mot husprisrisk som idag utgör en stor del av hushållens totala portföljrisk. Denna studie undersöker en möjlighet för hushåll att försäkra sig mot sådan risk genom ett så kallat index-länkat bolån som finansieras genom en fond. Studien kontrollerar hur ett index-länkat lån kan struktureras och hur det påverkar banken, låntagaren och fondinvesteraren i jämförelse med ett traditionellt bolån. Lånets nominella värde och därmed även räntebetalningarna som är kopplade till lånet varierar enligt förändringar i HOX Flats Stockholm Index. Lånestrukturen optimerats genom linjär optimering med hänsyn till låntagarens lönsamhet och med bivillkor på bankens och fondens risktagande respektive lönsamhet. Den optimerade strukturen testas genom scenarioanalys för olika utfall av lägenhetsprisutveckling samt genom en känslighetsanalys av den  raditionella bolåneräntan. Resultaten visar att den månatliga betalningsbördan för räntebetalningarna alltid kommer att vara lägre för hushåll som håller ett index-länkade bolånet än för de som innehar ett vanligt lån. Det index-länkade lånet innebär att bolånetagare får ge upp en viss del av vinsten då bostadspriser stiger i förhållande till ett vanligt bolån men ger ett skydd mot förluster vid en nedgång i bostadspriser. Fonden visar sig kunna ge en god avkastning i relation till indexets utveckling och ger ett visst skydd mot fall i bostadsmarknaden. Banken som ger ut indexlänkade bolån kommer alltid att gå med vinst, dock är vanliga bolån mer lönsamma vid nedgång i huspriser. Fortsättningsvis minskar risken att ”defaulta” för hushåll med det index-länkade bolånet då huspriser faller eftersom strukturen innebär ett loan to value ratio (LTV) under 100 procent upp till en prisnedgång på 40 procent. Resultatet visar att index-länkade lån passar låginkomsttagare och hushåll som ommer att ha svårt att betala tillbaka sitt lån om bostadspriserna faller. Studien bidrar till teori inom husprisriskförsäkring samt till teori inom finansiell innovation