Theories on loan portfolio swap hedging are based on a portfolio-choice approach. This paper presents an alternative: a firm-theoretic model for bank behavior with loan portfolio swaps. Our paper derives the optimal loan rate and rate-taking loan amount of the bank’s portfolio, and relates...

This paper proposes a framework for bank equity valuation based on a path-dependent, barrier option model. A direct implication of this framework is that bank equity will be priced as a down-and-out call option. Using this approach, we examine how bank interest margin, i.e., the spread between...

This article proposes a framework for bank default risk measure under government capital injection explicitly coinciding with an adverse signal that a rescued bank is expected to have significant future losses. A bank facing a serious problem of early closure may have a strong incentive to...

Sunflower management describes a style of management adopted by chief executive officer (CEO) in an attempt to produce a consensus between his own view and the view that he ascribes to the board. This paper develops a model that combines the contingent-claim pricing of bank equity and the...

The main purpose of this paper is to model bank spread behavior under capital regulation and deposit insurance. Comparative static results show that an increase in the capital-to-deposits ratio or the deposit insurance decreases the bank's interest margin or spread. It is also shown that an...