Modeling loan commitments
AbstractLoan 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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Bibliographic InfoArticle provided by Elsevier in its journal Finance Research Letters.
Volume (Year): 5 (2008)
Issue (Month): 1 (March)
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