Pricing and Hedging of Contingent Credit Lines

Pricing and Hedging of Contingent Credit Lines

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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.The payoff at time t2 of the caplet with a fixed strike rate of K is N 6 (L151 a€” K)+agt; where N is the notional amount decided ... 22Note that here we are modeling the risk-free forward rate drift instead of calculating it explicitly under the risky bondanbsp;...

Title:Pricing and Hedging of Contingent Credit Lines
Author: Elena Loukoianova, Salih N. Neftci, Mr. Sunil Sharma
Publisher:International Monetary Fund - 2006-01-01

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