Abstract

In this paper we discuss the pricing of commercial real estate index
linked swaps (CREILS). This particular pricing problem has been studied
by Buttimer et al. (1997) in a previous paper. We show that their results
are only approximately correct and that the true theoretical price of the
swap is in fact equal to zero. This result is shown to hold regardless
of the specic model chosen for the index process, the dividend process,
and the interest rate term structure. We provide an intuitive economic
argument as well as a full mathematical proof of our result. In particular
we show that the nonzero result in the previous paper is due to two specic
numerical approximations introduced in that paper, and we discuss these
approximation errors from a theoretical as well as from a numerical point
of view.