Loan Guarantees: An Option Pricing Theory Perspective

Authors

  • Fabio Pizzutilo University of Bari "Aldo Moro"
  • Francesco Calò University of Urbino "Carlo Bo"

Abstract

In this paper we analyse security loan guarantees in the light of the option pricing theory. We interpret them as put options on the cash flows of a secured debt. We highlight that the value of the guarantee is always positive before a loan's maturity and it depends on the same factors that determine the value of a financial option. We also analyse their value in the condition of market efficiency and we conclude that the inefficiencies of the financial markets justify their existence. Finally, we focus our attention on public agencies' intervention by offering credit guarantees to private firms.

Keywords: Loan guarantee; option pricing theory; public guarantee; guarantee value

JEL Classifications: H81

Downloads

Download data is not yet available.

Downloads

Published

2015-10-16

How to Cite

Pizzutilo, F., & Calò, F. (2015). Loan Guarantees: An Option Pricing Theory Perspective. International Journal of Economics and Financial Issues, 5(4), 905–909. Retrieved from https://www.econjournals.com/index.php/ijefi/article/view/1432

Issue

Section

Articles