Securities Lending Strategies, Valuation of Term Loans Using Option Theory (Presentation Slides)

36 Pages Posted: 21 Nov 2016

See all articles by Ravi Kashyap

Ravi Kashyap

Gain Knowledge Group; Estonian Business School; City University of Hong Kong (CityU) - Department of Economics & Finance

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Date Written: November 15, 2016

Abstract

We develop models to price long term loans in the securities lending business. These longer horizon deals can be viewed as contracts with optionality embedded in them and can be priced using established methods from derivatives theory, becoming to our limited knowledge, the first application that can lead to greater synergies between the operations of derivative and delta-one trading desks, perhaps even being able to combine certain aspects of the day to day operations of these seemingly disparate entities. We develop a heuristic that can mitigate the loss of information that sets in, when parameters are estimated first and then the valuation is performed, by directly calculating the valuation using the historical time series. We run numerical simulations to demonstrate the practical applicability of these models. These models are part of one of the least explored yet profit laden areas of modern investment management.

We illustrate how the methodologies developed here could be useful for inventory management. All these techniques could have applications for dealing with other financial instruments, non-financial commodities and many forms of uncertainty. Admittedly, our initial ambitions to produce a normative theory on long term loan valuations are undone by the present state of affairs in social science modeling. Though we consider many elements of a securities lending system at face value, this cannot be termed a positive theory. For now, if it ends up producing a useful theory, our work is done.

Keywords: Securities Lending, Term Loan, Fixed Rate, Uncertainty, Option, Derivative

JEL Classification: G11, G13, G17

Suggested Citation

Kashyap, Ravi, Securities Lending Strategies, Valuation of Term Loans Using Option Theory (Presentation Slides) (November 15, 2016). Available at SSRN: https://ssrn.com/abstract=2870213 or http://dx.doi.org/10.2139/ssrn.2870213

Ravi Kashyap (Contact Author)

Gain Knowledge Group ( email )

1 Austin Road West
Kowloon
Hong Kong

HOME PAGE: http://www.gainknowledgegroup.com

Estonian Business School ( email )

City University of Hong Kong (CityU) - Department of Economics & Finance

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