Interest-rate risk in non-maturity banking products : implied options in core deposits

Financial institutions bear different kind of risks and, particularly, interest rate risk. In this paper, we propose a methodology, firstly to estimate the market value of savings accounts and secondly, to measure the interest rate risk associated to this non-maturity product. Our analysis assumes that the market is segmented and that the retail activity has a positive NPV. We show that, when there are legal and commercial constraints that are modelled with caps and floors, the market value of saving accounts displays positive convexity around the floor and negative convexity around the cap. This result is crucial because the convexity has a price that should be included in the transfer price of the product. Another important consequence is that the savings accounts convexity cannot be replicated with a portfolio that only includes straight or zero-coupon bonds