Economy – Quantitative Finance – Portfolio Management
Scientific paper
2010-10-11
Economy
Quantitative Finance
Portfolio Management
13 pages, 2 figures
Scientific paper
A stock loan is a contract whereby a stockholder uses shares as collateral to borrow money from a bank or financial institution. In Xia and Zhou (2007), this contract is modeled as a perpetual American option with a time varying strike and analyzed in detail within a risk--neutral framework. In this paper, we extend the valuation of such loans to an incomplete market setting, which takes into account the natural trading restrictions faced by the client. When the maturity of the loan is infinite, we use a time--homogeneous utility maximization problem to obtain an exact formula for the value of the loan fee to be charged by the bank. For loans of finite maturity, we characterize the fee using variational inequality techniques. In both cases we show analytically how the fee varies with the model parameters and illustrate the results numerically.
Grasselli Matheus R.
Velez Cesar G.
No associations
LandOfFree
Stock loans in incomplete markets does not yet have a rating. At this time, there are no reviews or comments for this scientific paper.
If you have personal experience with Stock loans in incomplete markets, we encourage you to share that experience with our LandOfFree.com community. Your opinion is very important and Stock loans in incomplete markets will most certainly appreciate the feedback.
Profile ID: LFWR-SCP-O-658881