Modeling loan commitments |
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| Authors: | Sudheer Chava Robert Jarrow |
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| Affiliation: | aFinance Department, Mays Business School, Texas A&M University, College Station, TX 77843, USA;bJohnson Graduate School of Management, Cornell University, Ithaca, NY 14853, USA |
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| Abstract: | 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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| Keywords: | Loan commitments Credit risk Reduced form models Commercial paper credit lines Default intensity |
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