In Risk–adjusted Lending Conditions the author presents a model, to measure and calculate loan risks, showing how it functions and how it may be applied. His approach has its origins in the ideas put forward by Black/Scholes in 1973, and thus owes much to option price theory. From this the author has succeeded in developing a solution such that, whatever a company′s debt position and however its balance sheet may be structured, any situation can be individually assessed. Building on this, he demonstrates how combinations of loans with the lowest possible interest costs can be tailor–made for any company. The book contains numerous examples, making it easy for practising bankers to see how the model may be applied.
Part I: Outline.
Part II: Mathematical Foundations of the Model.
Probability model: Development of ψj.
Calculation of the shortfall risk hedging rate in the special case of shortfall risks being constant.
Calculation of the shortfall risk hedging rate in the general case of variable shortfall risk.
Shortfall risk on uncovered loans on the basis of statistics.
Part III: Option–Theory Loan Risk Model.
Shortfall risk on uncovered loans to companies on the basis of an option–theory approach.
Loans covered against shortfall risk.
Calculation of the combination of loans with the lowest interest costs.
Part IV: Implementation in practice.
Procedure according to the model for assessing the risk in lending to a company.
Appendix 1: Notation.
Appendix 2: Excel worksheet.
Appendix 3: Property price index.
Appendix 4: Chapter 3 Derivations.
Appendix 5: Chapter 4 Derivations.
Appendix 6: Chapter 5 Derivations.