PAPIN, TIMOTHEE; TURINICI, GABRIEL - In: International Journal of Theoretical and Applied … 17 (2014) 04, pp. 1450028-1
We investigate in this paper a perpetual prepayment option related to a corporate loan. The short interest rate and default intensity of the firm are supposed to follow Cox–Ingersoll–Ross (CIR) processes. A liquidity term that represents the funding costs of the bank is introduced and...