An Analysis of the Effect of Embedded Option on Duration-match Strategy of Commercial Banks
With China's market economy undergoing a further development,the fluctuation of interest rate becomes more frequent and wider in range.An increasing number of embedded options are inevitably contained in the assets and liabilities of banks,which has become a new problem in the management of interest rate risk.Based on the identification,decomposition and theoretical analysis of the effects of embedded option on duration model,this paper used the jump model and analyzed the effect of embedded option on the duration-match strategy of commercial banks comprehensively based on the Monte Carlo simulation method.The main results are as follows:if there are no embedded options in deposits and loans,duration-match strategy will be enough for a bank to avert interest rate risk;if there are embedded options in deposits and loans,matching the effective duration can only hedge the duration mismatch risk,and the embedded options bring additional optional risks to the bank through convexity gap.