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Fixed Rate Loan Commitments, Take-Down Risk, and the Dynamics of Hedging with Futures

Published online by Cambridge University Press:  01 December 2009

Thomas S. Y. Ho  and
Anthony Saunders
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Extract

This paper develops a normative model to analyze the hedging and fee-pricing decisions of a financial institution supplying fixed rate loan commitments to its customers. In supplying fixed rate loan commitments, the financial institution (hereafter referred to as “bank”) is assumed to act as an agent that transforms commitment risk through the use of financial futures contracts. While most previous loan commitment models have analyzed the interest rate (or price) risk the bank faces in supplying fixed rate loan commitments, they either have ignored or assumed away the loan take-down (or quantity) risk.

Type
Selected Papers from the 1983 Annual Conference
Information
Journal of Financial and Quantitative Analysis , Volume 18 , Issue 4 , December 1983 , pp. 499 - 516
Copyright
Copyright © School of Business Administration, University of Washington 1983

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