The Valuation of Italian Floating Rate Treasuries

The paper describes a method for valuing floating rate notes. A short introduction surveying the literature in this field and outlining the organization of the work is followed by a description of the features of floating rate Italian Treasury credit certificates (CCTs) and a breakdown of their prices. The following section puts forward and analyzes a simple generalization of the formula for valuing elementary floating rate coupons associated with the one-factor Cox, Ingersoll and Ross model. Specifically, the paper highlights the special properties of such mini-securities, which, depending on their maturity, react positively or negatively to changes in the state variable of the model (the instantaneous interest rate). Some extensions of the valuation formula then make it possible to take account of the specific characteristics of the reference parameter provided for in the rules governing issues of CCTs. Finally, the daily prices of these securities are analyzed over a period of around ten years. The empirical test makes it possible to estimate a variable that measures the extra risk the market associates with CCTs. The changes in this variable over time suggest a number of considerations concerning operators’ perception of this risk.