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Digital
Library of the European Council for Modelling and Simulation |
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Title: |
Valuation Of The Prepayment Option In The Banking
Book |
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Authors: |
Petra Kalfmann, Janos Szaz, Agnes Vidovics-Dancs |
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Published in:
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(2017).ECMS 2017 Proceedings
Edited by: Zita Zoltay
Paprika, Péter Horák, Kata Váradi, Péter Tamás Zwierczyk, Ágnes Vidovics-Dancs, János Péter Rádics European Council for Modeling and Simulation. doi:10.7148/2017 ISBN:
978-0-9932440-4-9/ ISBN:
978-0-9932440-5-6 (CD) 31st European Conference on Modelling and Simulation, Budapest, Hungary, May 23rd
– May 26th, 2017 |
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Citation
format: |
Petra
Kalfmann, Janos Szaz, Agnes
Vidovics-Dancs (2017). Valuation Of The Prepayment
Option In The Banking Book, ECMS 2017 Proceedings Edited by: Zita Zoltay Paprika, Péter Horák, Kata Váradi, Péter Tamás Zwierczyk, Ágnes Vidovics-Dancs, János Péter Rádics European Council
for Modeling and Simulation. doi:
10.7148/2017-0135 |
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DOI: |
https://doi.org/10.7148/2017-0135 |
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Abstract: |
One
of the most important perspectives of interest rate risk in the banking book
(IRRBB) is the valuation of socalled embedded
options and the quantification of their impact on the value of bank
portfolios. One unequivocal characteristic of mortgage portfolios is the
option of prepayment, providing the borrower the possibility of redeeming
their debt before maturity. We have created a theoretical model for valuing
the prepayment option, based on which it can be demonstrated that, depending
on the composition of the given bank portfolio (interest rate level, term to
maturity), the prepayment option may have a significant effect on the sum of
short-term interest income, as well as on the discount value of the bank
portfolio via changing cash flows, and through this the value of economic
capital. In this paper we analyse the impact of a
possible model specification risk and the impact of changing the composition
of banking portfolio under investigation. |
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