Strategic Risk and Cost Adjusted Pricing
RiskNEWS, March 2003
12 Pages Posted: 18 Apr 2003
One of the main components of the credit risk management of individual clients is the correct risk and cost adjusted pricing of financial products on the background of a financial institution's profitability targets.
The article derives pricing formulas for fixed rate bonds, i.e. for zero bonds, straight bonds, and amortizing bonds, and for European options that consider the exact cash flow structure of the products and integrate refinance costs, costs of risk, costs of equity and production expenses.
Finally, we show how the results can be integrated in a bank's internal funds transfer pricing methodology.
Note: The downloadable paper is in German.
JEL Classification: G21
Suggested Citation: Suggested Citation