Journal
FINANCE RESEARCH LETTERS
Volume 5, Issue 1, Pages 11-20Publisher
ACADEMIC PRESS INC ELSEVIER SCIENCE
DOI: 10.1016/j.frl.2007.11.002
Keywords
Loan commitments; Credit risk; Reduced form models; Commercial paper credit lines; Default intensity
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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. (c) 2007 Elsevier Inc. All rights reserved.
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