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A Note on Hedging a Loan Portfolio

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Abstract

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.

Suggested Citation

  • Udo Broll & Peter Welzel, 2003. "A Note on Hedging a Loan Portfolio," Discussion Paper Series 250, Universitaet Augsburg, Institute for Economics.
  • Handle: RePEc:aug:augsbe:0250
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    File URL: http://www.wiwi.uni-augsburg.de/vwl/institut/paper/250.pdf
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    References listed on IDEAS

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

    Keywords

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

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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