Loan Guarantees: An Option Pricing Theory Perspective

International Journal of Economics and Financial Issues, 2015, 5(4), 905-909

5 Pages Posted: 27 Oct 2015

See all articles by Fabio Pizzutilo

Fabio Pizzutilo

Università degli Studi di Bari “Aldo Moro”

F. Calò

University of Urbino - Faculty of Economics

Date Written: October 26, 2015

Abstract

In this paper we analyze 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 analyze 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 Classification: H81

Suggested Citation

Pizzutilo, Fabio and Calò, Francesco, Loan Guarantees: An Option Pricing Theory Perspective (October 26, 2015). International Journal of Economics and Financial Issues, 2015, 5(4), 905-909, Available at SSRN: https://ssrn.com/abstract=2680272

Fabio Pizzutilo (Contact Author)

Università degli Studi di Bari “Aldo Moro” ( email )

largo Abbazia S. Scolastica, 53
Bari, 70124
Italy

Francesco Calò

University of Urbino - Faculty of Economics ( email )

Via Saffi 42
61029 Urbino
Italy

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