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Pricing and Hedging of Contingent Credit Lines

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Author Info

  • Elena Loukoianova
  • Salih N. Neftci
  • Sunil Sharma

Abstract

Contingent credit lines (CCLs) are widely used in bank lending and also play an important role in the functioning of short-term capital markets. Yet, their pricing and hedging has not received much attention in the finance literature. Using a financial engineering approach, the paper analyzes the structure of simple CCLs, examines methods for their pricing, and discusses the problems faced in hedging CCL portfolios.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/13.

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Length: 26
Date of creation: 01 Jan 2006
Date of revision:
Handle: RePEc:imf:imfwpa:06/13

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Related research

Keywords: Banking; Economic models; credit line; credit lines; hedging; bond; hedge; capital markets; financial institution; deposit insurance; bonds; discount bond; money markets; micro finance institutions; financial economics; corporate information; hedges; financial market; zero-coupon bonds; discount bonds; coupon bonds; money market; bond price; default-free bond; interest rate derivatives; bond prices; finance institutions;

This paper has been announced in the following NEP Reports:

References

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  1. Mosebach, Michael, 1999. "Market response to banks granting lines of credit," Journal of Banking & Finance, Elsevier, vol. 23(11), pages 1707-1723, November.
  2. Shockley, Richard L & Thakor, Anjan V, 1997. "Bank Loan Commitment Contracts: Data, Theory, and Tests," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(4), pages 517-34, November.
  3. Black, Fischer, 1976. "The pricing of commodity contracts," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 167-179.
  4. Philipp J. Schönbucher, 2000. "A Libor Market Model with Default Risk," Bonn Econ Discussion Papers bgse15_2001, University of Bonn, Germany.
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Cited by:
  1. Chateau, John-Peter D., 2009. "Marking-to-model credit and operational risks of loan commitments: A Basel-2 advanced internal ratings-based approach," International Review of Financial Analysis, Elsevier, vol. 18(5), pages 260-270, December.
  2. Pinaki Bag & Michael Jacobs Jr, 2011. "Parsimonious exposure-at-default modeling for unfunded loan commitments," Journal of Risk Finance, Emerald Group Publishing, vol. 13(1), pages 77-94, January.
  3. Heidorn, Thomas & Schmaltz, Christian & Kunze, Wolfgang, 2008. "Liquiditätsmodellierung von Kreditzusagen (term facilities and revolver)," Frankfurt School - Working Paper Series 93, Frankfurt School of Finance and Management.
  4. Chava, Sudheer & Jarrow, Robert, 2008. "Modeling loan commitments," Finance Research Letters, Elsevier, vol. 5(1), pages 11-20, March.

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