Abstract
The paper examines the Czech crown money market in terms of products and volumes traded. The interest rate time series for the last 10 years are surveyed, and a parsimonious model is used to investigate to what extent the marketplace serves as the starting point for pricing customer cash products. Although satisfactory long-term relationships are observed, market disruptions are breaking up the assumed coherence. Special attention has to be paid to the decoupling of official fixing rates (PRIBOR) and real market rates in the current low interest rate environment.
Highlights
The selection of the proper yield curve and the accurate interest rate for pricing financial products has become a challenge since the onset of the global financial crisis in summer 2007
Cash products are represented by T-Bills, deposits2, repos, FX swaps and cross currency interest rate swaps, while the derivatives are represented by forward rate agreements (FRA) and interest rate swaps (IRS, including overnight index swaps - OIS)
We have separately assessed the pass-through of the 3M PRIBOR and 3M swap rate into the bank lending rates, first for the whole period 2006-2015 and for time periods separated into 5 blocks, each consisting of 24 monthly observations (2 full calendar years)
Summary
The selection of the proper yield curve and the accurate interest rate for pricing financial products has become a challenge since the onset of the global financial crisis in summer 2007. A multiple-curve framework has developed, with interest rates formed by a set of basis adjustments and risk premiums.. Special attention has to be paid to the creation of the official fixing rates as the starting point for further yield curve construction and as the basis for setting the interest rate in customer products. D.: The Czech Crown Money Market as the Source for Pricing CustomerCcash Products
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