Residential mortgage rates in Hong Kong have fallen to a historic low level since late 2004, largely because of severe competition and the prevailing exceptionally low funding cost of the banks. Because of the abundance of liquidity in the banking system, HIBOR is at an abnormally deep discount...

Currency option traders usually use the Black-Scholes model in which the exchange rate follows a lognormal process. However, it is found that exchange rates may follow a mean-reverting process instead, for example, certain currencies are constrained to move inside target zones or under a...

This paper presents a benchmarking model for validation of default probabilities of listed companies for Basel II purposes. The model is based on the recent studies on the predictive capability of structural credit risk models. Benchmark ratings and one-year default probabilities are assigned to...

The theoretical prediction of target exchange rates expects mean reversion of the exchange rates. This paper presents a model for valuing European foreign exchange options, in which the forward foreign exchange rate follows a mean-reverting lognormal process. The mean-reverting process has...

This paper develops a simple model for measuring the provision for a pool of collateralised retail loans with homogenous characteristics (i.e. the same type of collateral and broadly the same loan-to-value ratio) due to default, where the collateral coverage is treated as a put option with the...

The HKMA has completed a research study on the setting of mortgage rate by Authorized Institutions (AIs). The purpose of the project is to consider whether in an environment of intensive competition and, until recently, abundant liquidity in the banking system, the AIs have adequately taken into...

This paper extends the stationary-leverage-ratio model of credit risk measurement to incorporate a time-dependent target leverage ratio of a firm. The theoretical hypothesis of the existence of a time-dependent target leverage ratio reflects the movement of a firm's initial target ratio toward a...

Hong Kong¡¯s Linked Exchange Rate system (LERS) has been in operation for 25 years during which time many other fixed exchange rate systems have succumbed to shocks and/or speculative attacks. This fact alone suggests that the LERS is a robust system which enjoys a large measure of credibility...

The international transmission of shocks in the global financial system has always been an important issue for policy makers. Different types of foreign shocks have different effects and policy implications. In this paper, we examine the effects of the recent U.S. financial crisis and the...