Empirical Study On Measurement Of Interest Rate Risk Based On Embedded Option In Commercial Bank

The market-oriented interest rate is the necessary requirement of the financial reformation and entrance to WTO. The market-oriented interest rate is also an important link in the chain of the market-oriented finance of our country. The market-oriented interest rate results in both the right of fund-pricing independently of the commercial bank and the main market risk. An inevitable problem is that on one hand commercial banks have more freedom to price in market conditions, on the other hand, interest rate fluctuates more and more frequently. Interest rate risk has become the primary market risk.As the rapid development of financial innovation and financial derivatives, more and more embedded options appear on balance sheet. The existence of embedded options results in a greater interest rate risk in commercial banks. So it's necessary to study the measurement of interest rate risk based on embedded option.First of all, this paper introduces interest rate risk in commercial banks and the measurement, which is interest rate sensitivity gap method and duration gap method. Then from the definition of embedded option, analyzes the influences of embedded option on duration, and finds that the two measurements don't measure interest rate risk based on embedded option. So we select effective duration as the measuring index. Ascertaining the option-adjusted spread is the key of calculating effective duration. The paper analyzes the various calculation steps. Finally, according to China's actual situation, the paper analyzes the interest term structure model and prepayment model, and according to Monte-Carlo simulation method, simulates the interest path of"2005-1 MBS", and then derives the concrete realization of the process of option-adjusted spread.