Risk-Adjusted Lending Conditions: An Option Pricing Approach

In order to operate their lending business profitably, banks must know all the costs involved in granting loans. In particular, all the expenses they incur in covering losses must be included. Provided loan risks can be calculated, it is possible in each case to charge a price that is appropriately adjusted for risk, thus making it possible to make high-risk loans.

In "Risk-adjusted Lending Conditions" the author presents a model, to measure and calculate loan risks, showing how it functio...