| Author: | Chateau, J.-P. Dufresneb, D. |
| Title: | The stochastic-volatility American put option of banks' credit line commitments: Valuation and policy implications |
| Journal: | International Review of Financial Analysis
2002 : VOL. 11:2, p. 159-182 |
| Index terms: | AMERICA OPTIONS CREDIT VALUATION |
| Language: | eng |
| Abstract: | This paper investigates commitment credit risk and valuation in connection with their risk-adjusted balance used in computing the bank's capital requirement mandated by the Bank for International Settlements (BIS). In a two-factor model of the marked-to-market value of the credit line (CL), x, and its mean-reverting volatility, V, the value of the American commitment put is obtained as the sum of a Fourier-based solution for the European put and a quadratic approximation for the early-exercise premium. Once computed, the put value is combined with the line fees and a conditional exercise- cum-takedown proportion to determine the commitment net value and the bank's exposure to commitment credit risk. |
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