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A Note on Hedging a Loan Portfolio

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In the framework of the industrial economics approach to banking we extend the analysis of hedging against default on loans to the case of two types of credit risk. Standard results on the optimal hedge volume and the hedging effectivity from the single-risk case are shown to carry over to the portfolio case in a non-trivial but intuitive way.

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File URL: http://www.wiwi.uni-augsburg.de/vwl/institut/paper/250.pdf
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Paper provided by Universitaet Augsburg, Institute for Economics in its series Discussion Paper Series with number 250.

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Length: pages
Date of creation: Sep 2003
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Handle: RePEc:aug:augsbe:0250

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Keywords: banking; credit risk; loan portfolio; credit derivative; hedging effectivity;

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  1. Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061937, December.
  2. Udo Broll & Thilo Pausch & Peter Welzel, 2002. "Credit Risk and Credit Derivatives in Banking," Discussion Paper Series 228, Universitaet Augsburg, Institute for Economics.
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