The Design And Pricing Of Interest Rate Linked Financing Products In China

Interest rate linked structured financing products, which is also called interest rate structured products, is a kind of products whose value is linked with interest rate. As the marketization of interest rate in China continues to advance, the market size of the interest rate linked structured products is gradually increasing, and species are becoming rich at the same time. However, due to the short time since the structured products come into China, the deficient innovation ability of our commercial banks and other reasons, some problems, like poor pricing ability of commercial banks, high homogeneity of products, exist in the market of China. L1BOR market model based on the existing literature, is used in this paper to analyze the rationality of the existing product pricing, with the help of Monte Carlo simulation method, to make a reference for the commercial banks in terms of product pricing.The domestic and foreign literature about the research are summarized in the first section, including the aspects of product pricing, theory model, product characteristics and risk management; then the concept, characteristics, classification and developing process of this product are discussed; The followed is the current developing situation of the product in China, and some problems; Supply and demand analysis, yield and risk analysis, and the needed parameters for the product are found out in the next section; Then the theoretical model for pricing interest rate linked structured products were summarized, in order to select the appropriate model for the empirical part; Finally an existing product in Chinese market is selected to find out whether the pricing is reasonable, according the theoretical value calculated by using the LIBOR market model and Monte Carlo simulations, with the help of the MATLAB software.In the empirical part, a rate linked structured product from A bank is selected to analyze whether the pricing is reasonable, through the comparison between the theoretical value of the product and the actual price. The investment period of the product is 91 days, and the interest rate is linked to the USD 3-month LIBOR. The final rate of return is determined by how many days the linked rate fall into the interest rate interval set before, so that this is a typical interval rate linked product. When calculating the theoretical value, the product is split into a zero coupon bond and an interest rate options. The discounted cash flow model is used to calculate the value of the zero coupon bond, and the LIBOR market model is used to calculate the value of interest rate options. The LIBOR market model is a little complicated, in which the spot rates of day 1-91 are calculated first used by three order spline interpolation method according to the spot rate published the day before the investment, then daily forward rates of day 1-91 are estimated according to the formula of forward rate and spot rate, finally the daily spot rates in the investment period are estimated using core formula of LIBOR market model. At last 10000 simulations are made used by Monte Carlo simulation to estimate the USD 3-month LIBOR trend, and the theoretical value of interest rate options is finanlly calculated. The theoretical value of the product, which is the sum of theoretical value of the zero coupon bond and interest rate option, and the actual price are compared to judge whether the pricing is reasonable.According to the conclusion, theoretical value of the product selected in this paper is larger than the actual price, which means the value is underestimated. According to the Monte Carlo simulation, the product selected has little chance to break through the interest interval, when macro environment is stable, the risk of this product is small, investors who invest in the product can get stable income. However, due to some defects of the model, some error may exist in the conclusion. This is a warning for commercial banks in our country when pricing financial products. On the one hand, select the appropriate model, on the other hand, combine the actual situation with the model to make amendments for the parameters as much as possible, so that the pricing of products can be as accurate as possible.