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Pricing and Hedging of Contingent Credit Lines

Author

Listed:
  • Ms. Elena Loukoianova
  • Salih N. Neftci
  • Mr. 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.

Suggested Citation

  • Ms. Elena Loukoianova & Salih N. Neftci & Mr. Sunil Sharma, 2006. "Pricing and Hedging of Contingent Credit Lines," IMF Working Papers 2006/013, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2006/013
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    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=18727
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    References listed on IDEAS

    as
    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. Schönbucher, Philipp J., 2000. "A Libor Market Model with Default Risk," Bonn Econ Discussion Papers 15/2001, University of Bonn, Bonn Graduate School of Economics (BGSE).
    3. 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 517-534, November.
    4. Black, Fischer, 1976. "The pricing of commodity contracts," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 167-179.
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    Cited by:

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    2. Chava, Sudheer & Jarrow, Robert, 2008. "Modeling loan commitments," Finance Research Letters, Elsevier, vol. 5(1), pages 11-20, March.
    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. Pinaki Bag & Michael Jacobs, 2011. "Parsimonious exposure-at-default modeling for unfunded loan commitments," Journal of Risk Finance, Emerald Group Publishing, vol. 13(1), pages 77-94, December.
    5. 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.

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