Journal of Banking & Finance Vol. 50 2015
Identifying, valuing and hedging of embedded options in non-maturity deposits
Abstract
Non-maturity deposits like savings accounts or demand deposits contain significant option risks caused by the bank’s discretionary pricing and the customers’ withdrawal right. Option risks follow from inherent non-linear factor exposures. I propose an ordinal response model for deposit rate jumps to identify non-linear factor exposures and a discrete-time term structure model to value the resulting option risks and to derive hedge measures “outside the model”. My delta profile resembles a constant maturity swap, but vega and gamma are more pronounced, which demonstrates that the widespread practice of static hedging with zero bonds is inadequate.
- DOI
- 10.1016/j.jbankfin.2014.09.013
- Volume
- 50
- Pages
- 34-51
- Language
- en
- Sources
- openalex crossref bibtex:phds-export.bib