Why Non-Dealer Banks May Write Interest Rate Options

Summary

The document describes a question about US commercial banks’ over-the-counter interest rate derivatives. In the data examined by the author, non-dealer banks have a substantial share of written options relative to their total interest rate derivative notional. The share is described as comparable to forwards and greater than purchased options, while swaps remain the largest instrument category. The options measure includes caps, floors, collars, corridors, and swaptions.

The author asks why end-user banks write options so often and whether this reflects a particular hedging strategy. The text does not include an answer, transaction-level evidence, or information about counterparties and underlying exposures. Notional shares alone cannot establish the economic purpose or risk of the positions: written options may arise from different hedging structures, and a written contract’s risk depends on its terms and the bank’s offsetting exposures. The document therefore frames an empirical question rather than identifying a specific strategy or explaining the observed pattern.

Key ideas

• The question concerns written OTC interest rate options held by non-dealer US banks.
• The author reports that written options form a notable share of these banks’ derivative notionals.
• The category includes caps, floors, collars, corridors, and swaptions.
• The document asks whether option writing reflects a particular hedging strategy but provides no explanation.
• Notional shares alone do not reveal the positions’ purpose or net risk.

Tags

# Banks' use of written interest rate options


# Banks' use of written interest rate options












I study US commercial banks data. I look at the notional amounts of their different OTC interest rate derivatives for the recent years. When I look at non-dealer banks (i.e. end-users), I find that they have a relatively high share of written interest rate options (in terms of the notional amount of the total portfolio of interest rate derivatives). The share of written options is comparable to share of forwards, and much higher than the share of purchased options (but lower than the swap share which is the most used instrument)

I would like to understand why the share of written options for non-dealer banks is relatively high compared to the share of purchased options or other instruments? Is it a specific hedging strategy? Note that the written and purchased option variables also include caps, floors, collars, corridors and swaptions.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.