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Valuing Income-Contingent Loans as Path-Dependent Options

Author

Listed:
  • Daehwan Kim

    (Konkuk University)

  • Jin-Yeong Kim

    (Konkuk University, Konkuk University)

Abstract

An income-contingent loan (ICL) contract can be viewed as a series of path-dependent options, and its value can be determined by applying an option pricing technique. This paper discusses conceptual and technical issues related to this approach and using the approach, determines the value of ICL contracts offered to university students in Korea in 2010. The value of an ICL contract is contrasted to the value of a comparable standard loan (SL) contract. Also, the option-based valuation is compared to the utility-based valuation.

Suggested Citation

  • Daehwan Kim & Jin-Yeong Kim, 2011. "Valuing Income-Contingent Loans as Path-Dependent Options," Korean Economic Review, Korean Economic Association, vol. 27, pages 273-291.
    • Handle: RePEc:kea:keappr:ker-20111231-27-2-05
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Income-Contingent Loan; Path-Dependent Option; Certainty Equivalent;
    All these keywords.

    JEL classification:

    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid
    • I23 - Health, Education, and Welfare - - Education - - - Higher Education; Research Institutions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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