Business Case Studies & Business Publications

Locked Tight Storage Facilities

Eades, Kenneth M.,...

Case

Locked Tight Storage Facilities

Eades, Kenneth M.; Marshall, S. Brooks

F-1120 | Published February 19, 1995 | 7 pages Case

Collection: Darden School of Business

Product Details

This case provides an opportunity to introduce and apply the pure-expectations theory of interest rates. It also brings out the fundamentals of option pricing by considering the refinancing option embedded in the long-term mortgage alternative. Because of the refinancing option, the spread charged by the bank for the long-term mortgage is too low, which suggests that an arbitrage opportunity is available by constructing a "homemade" interest-rate swap.