Pricing and Hedging of Contingent Credit Lines
IMF Working Papers, January 1, 2006
Source details
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- Pricing and Hedging of Contingent Credit Lines
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Bibliographic details
- Authors: Elena Loukoianova, Salih N. Neftci, Sunil Sharma
- Published: January 1, 2006
- Series: IMF Working Papers
Overview
- Contingent credit lines (CCLs) are widely used in bank lending and play an important role in the functioning of short-term capital markets.
- The paper notes that pricing and hedging of CCLs 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,
- discusses the problems faced in hedging CCL portfolios.
Main findings
- CCLs are important instruments in bank lending and short-term capital markets.
- There is a relative paucity of literature focused on pricing and hedging CCLs.
- A financial engineering framework can be used to dissect CCL structure and pricing, and to identify hedging difficulties.
Methods and pricing approaches
- The paper applies a financial engineering approach to:
- analyze the structure of simple CCLs,
- examine methods for pricing CCLs.
Hedging challenges
- The paper discusses the problems faced in hedging CCL portfolios, emphasizing practical difficulties in implementing hedges for contingent obligations.
Subjects and keywords
- Subject: Banking, Credit, Credit risk, Financial institutions, Financial regulation and supervision, Lines of credit, Loans, Money, Options
- Keywords: CCL characteristic, CCL contract, CCL facility, CCL price, CCL structure, companies credit-worthiness, Contingent credit line (CCL), CP market, Credit, credit risk, financial condition, forward rate, hedging, Lines of credit, Loans, Options, pricing, WP
Content in this bundle
- _wp0613 - References