This paper compares two strategies for replicating a put option used to synthetize a debt guarantee contract. The first strategy, super-replication, while maintaining the portfolio value greater or equal to a target value, minimizes the transaction cost of replicating a debt insurance put option...

We propose a framework a la Davis et al. (1993) and Whalley and Wilmott (1997) to study dynamic hedging strategies on portfolios of financial guarantees in the presence of transaction costs. We contrast four dynamic hedging strategies including a utility-based dynamic hedging strategy, in...

This paper compares two forms of governmental support programmes: loan guarantee and direct investment in public-private partnerships (PPPs). Under the loan guarantee programme, the government supports the project implementation by providing financial guarantees to enhance the project...

Although a considerable amount of research has been undertaken on detrimental risk taking by managers, much less studies are devoted to endogenizing risk choices in the context of corporate project financing and in the presence of financial guarantees. A firm's risk appetite increases greatly...

This paper analyses the effects of the maturities of credit-enhanced debt contracts on the value of an insurer's loan guarantee portfolios. We propose a contingent-claims model, that not only includes important features such as coupon payments and absolute priority violations, but also allows...

We use contingent claims analysis to evaluate portfolios of vulnerable private loan guarantees and to investigate their risk diversification properties. We find that for plausible baseline values of the parameters, the diversifiable credit risk can be eliminated in a portfolio of ten insured...

This paper analyzes the risk-management practices of a vulnerable credit insurer by studying the effects of time-varying correlations, asset risks and loan maturities on the risk-based capital that backs credit insurance portfolios. Since asset correlations may change over a business cycle, we...

Using quarterly financial statements and stock market data from 1982 to 2010 for the six largest Canadian chartered banks, this paper documents positive co-movement between Canadian banks’ capital buffer and business cycles. The adoption of Basel Accords and the balance sheet leverage cap...