Risk-Adjusted Lending Conditions: An Option Pricing Approach

Preface 2.

Part I: Outline.

Introduction.

Rating system.

Part II: Mathematical Foundations of the Model.

Probability model: Development of ψ_j.

Calculation of the shortfall risk hedging rate in the special case of shortfall risks being constant.

Calculation of the shortfall risk hedging rate in the general case of variable shortfall risk.

Shortfall risk on uncovered loans on the basis of statistics.

Part III: Option-Theory Loan Risk Model.

Shortfall risk on uncovered loans to companies on the basis of an option-theory approach.

Loans covered against shortfall risk.

Calculation of the combination of loans with the lowest interest costs.

Part IV: Implementation in practice.

Procedure – according to the model – for assessing the risk in lending to a company.

Applications.

Final considerations.

Appendix 1: Notation.

Appendix 2: Excel worksheet.

Appendix 3: Property price index.

Appendix 4: Chapter 3 – Derivations.

Appendix 5: Chapter 4 – Derivations.

Appendix 6: Chapter 5 – Derivations.

Bibliography.

Index.