Valuing Income-Contingent Loans as Path-Dependent Options

Daehwan Kim and Jin-Yeong Kim
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Daehwan Kim: Konkuk University
Jin-Yeong Kim: Konkuk University, Konkuk University

Korean Economic Review, 2011, vol. 27, 273-291

Abstract: An income-contingent loan (ICL) contract can be viewed as a series of path-dependent options, and its value can be determined by applying an option pricing technique. This paper discusses conceptual and technical issues related to this approach and using the approach, determines the value of ICL contracts offered to university students in Korea in 2010. The value of an ICL contract is contrasted to the value of a comparable standard loan (SL) contract. Also, the option-based valuation is compared to the utility-based valuation.

Keywords: Income-Contingent Loan; Path-Dependent Option; Certainty Equivalent (search for similar items in EconPapers)
JEL-codes: G12 I22 I23 (search for similar items in EconPapers)
Date: 2011
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