What Should You Pay to Cap your ARM?—A Note on Capped Adjustable Rate Mortgages
AbstractIn this paper, an Adjustable Rate Mortgage (ARM) and a Fixed Rate Mortgage (FRM) are formalized and studied in a simple continuous-time setting under the assumption of a simple one-factor Afﬁne Term Structure (ATS). Through an application of existing results from ATS theory, it is shown that when the short rate reaches a certain pre-determined boundary, the constant payment stream on a new FRM equals the payments on an existing ARM. Hereby, this paper provides a theoretical build-in cap on the formalized ARM. The ﬁnite boundary for the short-rate suggests that certain caps on ARMs should (in theory) be offered free of charge. View Full-Text
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Nordfang, M.-B. What Should You Pay to Cap your ARM?—A Note on Capped Adjustable Rate Mortgages. Int. J. Financial Stud. 2017, 5, 10.
Nordfang M-B. What Should You Pay to Cap your ARM?—A Note on Capped Adjustable Rate Mortgages. International Journal of Financial Studies. 2017; 5(1):10.Chicago/Turabian Style
Nordfang, Maj-Britt. 2017. "What Should You Pay to Cap your ARM?—A Note on Capped Adjustable Rate Mortgages." Int. J. Financial Stud. 5, no. 1: 10.
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