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Embedded options in commercial banking and their impact on asset liability management

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  • J. F. Boulier
  • P. Schoeffler

Abstract

Commercial bankers sell—more often give away—options to their clients like the prepayment facility attached to a mortgage or the right to obtain a credit at a prespecified interest rate which is associated in France with specific term deposits. This paper aims to present the financial consequences of these options from a microeconomic point of view and on the scale of the French banking system. We first example our valuation techniques and then analyse the impact on the balance sheet of a typical commercial bank, both in terms of value and sensitivity. Securitization is presented in this context as a way to monitor risk exposure. Finally the global impact of these embedded options in the French banking system is estimated and briefly discussed.

Suggested Citation

  • J. F. Boulier & P. Schoeffler, 1992. "Embedded options in commercial banking and their impact on asset liability management," Applied Stochastic Models and Data Analysis, John Wiley & Sons, vol. 8(3), pages 137-150, September.
    • Handle: RePEc:wly:apsmda:v:8:y:1992:i:3:p:137-150
    DOI: 10.1002/asm.3150080304
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