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3.14 Interactive FTS

Trading Case B02A

Case Objective

This case extends B02 (see chapter 2) to add both future interest rate uncertainty and private information.  This links concepts associated with the efficient markets hypothesis to the fixed income markets.  That is, how well do bond prices reflect the information that is privately available to different members of the trading crowd.

In this exercise different traders have different pieces of information about future spot rates.  The price discovery problem is very dynamic and determines how much information can be inferred from the yield curve.

Key Concepts

Informational efficiency and bond pricing.  Interest rate uncertainty.

Textbook Integration:  Background Reading

Section 3.10 Theories of the Term Structure of Interest Rates

Market Microstructure:  Rules Governing Trading

 market microstructure.

Instructor References for the FTS Interactive Markets

Overview of FTS Interactive Markets

Teaching Guide