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Modeling loan commitments

  • Chava, Sudheer
  • Jarrow, Robert

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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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
Contact details of provider: Web page: http://www.elsevier.com/locate/frl

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  16. Ho, Thomas S. Y. & Saunders, Anthony, 1983. "Fixed Rate Loan Commitments, Take-Down Risk, and the Dynamics of Hedging with Futures," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 18(04), pages 499-516, December.
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  18. Chateau, John-Peter D., 1990. "Valuation of 'capped' variable rate loan commitments," Journal of Banking & Finance, Elsevier, vol. 14(4), pages 717-728, October.
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