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

February 24, 2004

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, this paper examines the structure of CCLs, develops a method for their pricing, and discusses the problems faced in hedging CCL portfolios.

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