Securities Lending and Repos by Ralf Hohmann

Author:Ralf Hohmann
Language: eng
Format: epub
ISBN: 9783658419844
Publisher: Springer Fachmedien Wiesbaden

3.3.2 Discussion of Assumptions

This paper shows securities lending and repos on the financial markets of the Federal Republic of Germany. This requires assumptions about the conditions on the financial markets.

The assumptions are presented below and compared with reality. Deviations are to be shown and their effects on securities lending and repos in Germany analysed (see also Hohmann 1996, pp. 20–22, Faulkner 2005, pp. 7–8).1.

Arbitrage-free markets exist, all required instruments are traded there, the actual prices always correspond to the theoretical values.

This assumption is not entirely true. All instruments are not traded at all times, arbitrage opportunities also exist. However, if the required instruments are not traded, market participants can substitute them by duplication or simply neglect them. The mispricing of derivative instruments is of less relevance for the strategies to be shown. They aim at arbitrage with securities lending, repos and derivatives. The remoteness from reality of assumption 1. is to be tolerated in the following.

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