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Modeling loan commitments

Sudheer Chava and Robert Jarrow ()

Finance Research Letters, 2008, vol. 5, issue 1, 11-20

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.

Date: 2008
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