Title: An overview of the risk-neutral valuation of bank loans
Abstract: This paper provides an overview of a new methodology that allows banks to evaluate loans using the risk-neutral approach. In specifically, it illustrates the methodological framework behind the definition of the risk-neutral default probabilities used to estimate the loans credit spreads. These risk-neutral probabilities are calculated using a contingent-claims approach conceptually similar to the Black–Scholes and Merton framework for modeling corporate liabilities. The proposed risk-neutral approach is suitable for producing estimates, in a fair value computation context, that are as close as possible to the “exit price,” as mandated by IFRS 13, with a lower dependency on internal parameters.
Publication Year: 2015
Publication Date: 2015-01-01
Language: en
Type: article
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