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Modeling loan commitments

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Author Info
Chava, Sudheer
Jarrow, Robert

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Abstract

Loan commitments represent more than 82 percent of all commercial and industrial loans by domestic banks. This paper develops a valuation model for loan commitments incorporating early exercise, multiple fees, partial exercise and credit risk. The model is analytically tractable and easy to implement. Using a sample of commercial paper backup credit lines from the Dealscan database, we show that our model prices closely match loan commitment market prices.

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File URL: http://www.sciencedirect.com/science/article/B7CPP-4R8MDS0-1/1/f10d74467a7c746fb6c2fef485ef7b60
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Publisher Info
Article provided by Elsevier in its journal Finance Research Letters.

Volume (Year): 5 (2008)
Issue (Month): 1 (March)
Pages: 11-20
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Handle: RePEc:eee:finlet:v:5:y:2008:i:1:p:11-20

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Web page: http://www.elsevier.com/locate/frl

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  1. Sudheer Chava & Amiyatosh Purnanandam, 2006. "The effect of a banking crisis on bank-dependent borrowers," Proceedings, Federal Reserve Bank of Chicago, pages 367-385. [Downloadable!]
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