Valuation of Bank Interest Margin with Barrier Cap Option Model in Synergy Banking Operations Management

摘要

This paper proposes a synergy banking operations management framework for bank interest margin determination and default risk assessment based on pathdependent, a barrier cap option model instead of the commonly used path-independent call option approach. The author argues that path dependency in the synergy banking is an intrinsic characteristic of bank lending because bank equity can be knocked out whenever a legally binding barrier is breached in circumstances of the bank's provision of liquidity on demand to accommodate unpredictable needs. This model shows that a barrier on the market value of the bank's underlying loan repayments for triggering default prior to and closer to the maturity has a higher equity return and default risk. As a result, bank equity return and default risk in synergy banking operations management are overvalued when default only occurs at maturity of the debt.