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Identification and Price of Embedded Options in Deposits and Loans of Commercial Bank

Author: TangEnLin
Tutor: ZuoHaiFeng
School: Nanjing University of Finance and Economics
Course: Finance
Keywords: Commercial Bank Embedded Option Interest Rate Risk Management Term Structure of Interest Rate
CLC: F224
Type: Master's thesis
Year: 2011
Downloads: 59
Quote: 0
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Abstract


China has gradually reduced controls on risk rate since China joined in the WTO, interest rate in China is becoming increasingly market-oriented. So the fluctuation of the interest rate becomes more frequent and the volatility is also growing. This situation put forward the higher requirement to the interest rate management of the commercial bank. At the same time, as the development of financial innovation and the gradual increase in financial derivatives, Bank’s assets and liabilities also inevitably contained an increasing number of embedded options. Therefore, comprehensive understanding of embedded option, the generation mechanism and the measurement methods of embedded option, has become the task of risk management which cannot be avoided.In this paper, based on the characteristics of interest rate of china,a jump-diffusion model was selected to describe the path of interest rate in the background of interest rate market, in according with the type and executive strategy of embedded option, this paper prices the embedded option in the deposits and loans of commercial banks using American option pricing theory and method by means of Monte Carlo .At last, the thesis brought up ideas about how to control the risk of interest rate,contract restrictions,the pricing based on the embedded option,establishment of prepayment model, transference and hedge of risk of embedded option, then some useful suggestions were given.

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CLC: > Economic > Economic planning and management > Economic calculation, economic and mathematical methods > Economic and mathematical methods
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