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Pricing of cap insurance contracts is considered for political mortgage rates. A simple stochastic process for mortgage rates is proposed. The process is based on renewal processes for modelling the length of periods with downward and upward trend respectively. Prices are calculated by simulation of conditional future sample paths. Future conditional quantiles can be obtained to assess the risk of a contract. The method is illustrated by applying it to observed quarterly mortgage rates of the Swiss Union of Raiffeisenbanks for the years 1970 to 2001.

Do financial market analysts use structural economic models when forecasting exchange rates? This is the leading question analysed in this apper. In contrast to other studies we use expectations instead of realised data. Therefore we analyse the implicit structural models forecasters have in mind when forming their exchange rate expectations. Using expected short- and long-term interest rates and business expectations as explanatory variables we estimate latent structural models to explain expected exchange rates. A special hypothesis is whether exchange rate expectations are formed according to monetary models. The currencies included in the study are US dollar, British pound, Japanese yen, French franc and Italian lire, each defined against the German mark. A major finding of the analysis is that expected GDP is the most important variable (from the set of our variables) for the determination of exchange rate expectations. For the DM/US dollar expectations a Mundell-Fleming type model is compatible with the data. This means, that increasing interest rates will led to an appreciation of the corresponding currency. The opposite result have been found for French franc and Italian lire where high expected interest rates indicate a weak currency.