Title: Hedging Prepayment Risk on Retail Mortgages
Abstract: Hedging the interest rate risk of a retail mortgage portfolio is a diffi cult task for banks. Besides normal interest rate risk, there is risk caused by embedded options i.e. choices incorporated in the mortgage contract. In regular Dutch retail mortgages, the customer receives several embedded options. One of these options is the option to prepay the mortgage without incurring additional costs in case the customer moves to a new home. In this article we explain why there is risk when the customer receives this option. If the customer does not use the option, he will continue the current contract. We will also discuss how the resulting interest rate risk can be hedged and how to determine the hedging price. However let us fi rst discuss the mortgage’s fi nancing. Hedging Prepayment Risk on Retail Mortgages
Publication Year: 2009
Publication Date: 2009-01-01
Language: en
Type: article
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