A computational approach to pricing a bank credit line |
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Authors: | Bryan Stanhouse Al Schwarzkopf Matt Ingram |
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Institution: | Price College of Business, University of Oklahoma, 307 West Brooks, Norman, OK 73019, USA |
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Abstract: | Using trended Brownian motion to characterize borrower cash needs over time, we are able to derive a probability density function for the time to depletion of a bank credit line as well as the likelihoods for the time to exhausting the sources of liquidity that fund the loan. Armed with these analytic results, we solve for the credit line mark-up rate and the configuration of stored liquidity that maximizes the bank’s intertemporal expected profits from the loan. The optimality conditions produce a system of integral differential equations whose solutions we then simulate over a host of scenarios. |
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Keywords: | G21 |
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