Pricing and Hedging of Contingent Credit Lines

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Pricing and Hedging of Contingent Credit Lines

by Elena Loukoianova of the International Monetary Fund,
Salih N. Neftci of CUNY, and
Sunil Sharma of the International Monetary Fund

January 2006

Abstract: Contingent credit lines (CCLs) are widely used in bank lending and also play an important role in the functioning of short-term capital markets. Yet, their pricing and hedging has not received much attention in the finance literature. Using a financial engineering approach, the paper analyzes the structure of simple CCLs, examines methods for their pricing, and discusses the problems faced in hedging CCL portfolios.

JEL Classification: G13, G21, C15.

Keywords: Contingent credit line (CCL), pricing, hedging.

Published in: Journal of Derivatives, Vol. 14, No. 3, (Spring 2007), pp. ??-??.

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