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Research of Pricing Options Embedded in Deposits and Loans Using Monte Carlo Simulation

Author: GeXiaoFei
Tutor: MaJunHai
School: Zhejiang University of Finance
Course: Finance
Keywords: Embedded Options Jump - diffusion model Monte Carlo simulation Dual variables Control variables
CLC: F224
Type: Master's thesis
Year: 2008
Downloads: 277
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Abstract

In recent years, with the advance of China's financial market continues to open and market-oriented interest rate process, fluctuations in market interest rates more and more frequent and intense, has brought new opportunities and challenges to China's commercial banks: the frequent fluctuations in interest rates will make the business The banks face greater optionality risk. Traditional duration and convexity gap management method not only can not effectively manage the assets, liabilities implied interest rate risk of the option, but will also lead to risk managers to ignore the presence of its interest rate risk. Study of banks and other financial institutions assets, liabilities implied option pricing techniques in product development and risk management of China's commercial banks has important theoretical and practical significance. Embedded Option is a complex, multi-dimensional options, the use of numerical analysis, pricing analysis has become an indispensable means. Existing commercial banks to ignore the deposits and loans in the early implementation of the treaty to its potential risks, the paper-depth study of the impact of factors of bank deposits and loans with Embedded Options in the interest rate market conditions, and the use of statistical methods, Monte Carlo simulation technology, in-depth to explore such complex option pricing methods and variance reduction techniques. First, we analyzed from the investment behavior of depositors and lenders to proceed, Embedded Options on time deposits and loans in the nature, characteristics and implementation of the Boundary-depth discussion and come to such interest rate implicit options based on interest rate changes American options point of view;, in woodlands, Zheng Zhenlong (2004), on the basis of the implied option pricing analysis, review of traditional methods defects and shortcomings, leads to the easy-to-solve mathematical simulation of complex derivatives pricing issues. Secondly, on the basis of the implicit nature of the options analysis, analysis of the subject matter - the interest rate characteristics of complex interest rate derivatives Embedded Option and draw interest rates jump - diffusion model is more suitable for describing the current interest rate market behavior; integrated application econometric analysis methods, analysis and other methods of statistical analysis and stochastic processes in the Chinese market interest rates jump - diffusion model to estimate the parameters, the interest rate in line with the law of motion jump diffusion model, and will not join the jump compare interest rate model error adding jumping, jump in interest rates derived from the data comparison - diffusion model for fitting more realistic data authenticity and interest rate derivative products pricing more reasonable. Third, this study based on jump - diffusion model of interest rates implied option Monte Carlo simulation pricing model with the principles, combined with China's bank deposits, loan type of embedded options and investors optimal execution strategy theory, China's commercial banks five-year time deposits and 10 years of the early repayment of loans Embedded Option pricing, the results showed that: China's commercial banks deposit and loan business to carry out all ignore the implied value of the option, if Embedded Option fee charged, you can greatly reduce the liquidity risk of commercial banks to reduce their capital exposure. Among them, the five-year time deposits implied option value: the term loan 0.0015,10 implied option value: 0.0028. Commercial banks to carry out the process of deposit and loan business, on the basis of the time deposit rate, minus the option value; same time, on the basis of the loan interest rate, plus the option value, only for the more conservative, a reasonable interest rate. Finally, the shortcomings and disadvantages of the Monte Carlo simulation pricing, Monte Carlo simulation to optimize the introduction of the dual variables variance reduction and control variables variance reduction techniques, and variance reduction technology principles and techniques of process analysis, implied in option pricing in the 5-year time deposit rate and 10-year loans at the same time, for example, in four optimized Monte Carlo simulation of its pricing. The results show that the Monte Carlo simulation method can be effective pricing interest rate implicit in the deposit and lending options, and after variance reduction technology to improve the Monte Carlo simulation is more suitable for such complex options pricing. Through the reading of literature at home and abroad, coupled with the start of the theoretical research and empirical simulation, this thesis can draw the following conclusions: First, with the interest rate market step by step, the commercial bank deposit and lending interest rates implied option risk has become a non- ignore the interest rate risk; Second, the jump-diffusion model can better describe the interest rate behavior, showing better accuracy; Finally, Monte Carlo simulation and its variance to reduce the introduction of technology, our deposits and loans in the Embedded Option accurate pricing, and draw simulation variance reduction techniques can achieve the minimum variance and volatility.

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