Skip to main content
SpringerLink
Log in

An analysis of market-index certificates of deposit

  • Published:
Journal of Financial Services Research Aims and scope Submit manuscript

Abstract

We analyze the new market-index certificates of deposit (MICDs), which pay variable interest pegged to the performance of the Standard and Poor's (S&P) 500 stock market index. The pricing formulas as well as the equilibrium relationship between the participation percentages for both the call-and put-type MICDs are derived and discussed. From the implicit value of the option component we compute implied standard deviations (ISDs) for the market index, and find inconsistencies in the pricing policies of the recent issuers of MICDs. The terms under which “bear” versions are being offered are particularly unattractive, and offering better terms would create new opportunities for the issuers of MICDs. We also analyze the issuer's risk exposure, and discuss the natural as well as the dynamic hedging strategies.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Benston, G. and Kaufman, G. Risk and Solvency Regulation of Depository Institutions: Past Policies and Current Options. Monograph Series in Finance and Economics, Salomon Brothers Center for the Study of Financial Institutions, New York University Graduate School of Business Administration, Monograph 1988–1, 1988.

  • BlackF. and ScholesM.. “The Valuation of Option Contracts and a Test of Market Efficiency.” Journal of Finance 27 (1972), 399–417.

    Google Scholar 

  • BlackF. and ScholesM. “The of Options and Corporate Liabilities.” Journal of Political Economy 81 (1973), 637–659.

    Google Scholar 

  • ChanceD. and BroughtonJ. “Market Index Depository Liabilities: Analysis, Interpretation, and Performance.” Journal of Financial Services Research 1 (1988), 335–352.

    Google Scholar 

  • ChirasD. and ManasterS. “The Informational Content of Option Prices and a Test of Market Efficiency.” Journal of Financial Economics 6 (1978), 213–234.

    Google Scholar 

  • Kane, E. “Good Intentions and Unintended Evil: The Case Against Selective Credit Allocation.” Journal of Money, Credit and Banking (February 1977), 55–69.

  • KingS.R. and RemolonaE.M. “The Pricing and Hedging of Market Index Deposits.” Federal Reserve Bank of New York Quarterly Review 12 (Summer 1987), 9–20.

    Google Scholar 

  • LataneH. and RendlemanR. “Standard Deviations of Stock Price Ratios Implied in Option Prices.” Journal of Finance 31 (1976) 369–381.

    Google Scholar 

  • MertonR. “Theory of Rational Option Pricing.” Bell Journal of Economics and Management Science 4 (1973) 141–183.

    Google Scholar 

  • SchmallenseeR. and TrippiR. “Common Stock Volatility Estimates Implied by Option Premia.” Journal of Finance 33 (1978) 129–147.

    Google Scholar 

  • WalmsleyJ. The New Financial Instruments. New York: John Wiley & Sons, 1988.

    Google Scholar 

  • WhaleyR. “Valuation of American Options on Dividend-Paying Stocks.” Journal of Financial Economics 10 (1982), 29–58.

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Edwin L. Cox School of Business, Southern Methodist University, 75275, Dallas, TX, USA

    Andrew H. Chen (Distinguished Professor of Finance)

  2. College and Graduate School of Business, University of Texas at Austin, 78712-1179, Austin, TX, USA

    John W. Kensinger (Assistant Professor of Finance)

Authors
  1. Andrew H. Chen
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. John W. Kensinger
    View author publications

    You can also search for this author in PubMed Google Scholar

Rights and permissions

Reprints and permissions

About this article

Cite this article

Chen, A.H., Kensinger, J.W. An analysis of market-index certificates of deposit. Journal of Financial Services Research 4, 93–110 (1990). https://doi.org/10.1007/BF00352565

Download citation

  • Issue Date:

  • DOI: https://doi.org/10.1007/BF00352565

Keywords

Search

Navigation