3.2 Results In this section, we analyze two different variants of the model and their relationship to actual credit prices. We first compare the price of the EDF9-based model with the LPC price, then turn to the price of the EDF8-based model, which we compare to both the LPC and the EDF9 price. We then show how the value of the option – relative to our model – changes over time and how it relates to the actual impact of the loans repaid. if Pt is today the price of the loan, QDFt is the probability of default neutral in terms of risk for the next period, LGD is the neutral loss in case of default, c -LIBOR are the payments for the loan during the next period, r is the interest rate without risk and EQ (Pt-1-no default) is the expected value of the loan (calculated as part of the neutral measure in case of risk) end of the next period as the debtor was not late and payments were made. Note that we have the face value of the loan equal to one, for easy exposure. The evaluation procedure is simple in concept, but it is closely linked to implementation. We subdip the time interval between the evaluation date and the due date in a discrete number of times. For each period, there is a finite number of credit reports in which the borrower can reside. For each credit period, it is possible to calculate a risk-neutral probability of moving from this situation to another state using risk-neutral migration matrixes, far from the norm. We start with the maturity date and determine the cash flow of the loan for each credit statement. At maturity date, actual cash flows depend (i) on whether the loan is late, (ii) the stage of use (for revolvers) assigned to the credit statement and (iii) all quota price schedules for credit status. We then summarize a time interval and calculate, for each credit statement, the cash flows during that period as well as the discount value of the cash flows for the following period, as part of the risk-neutral ratio.

At this point, we are making the first instance of a decision in advance. The borrower can either pay in advance and generate a set of cash flow (the principal, down payment fees, down payment fees and all remaining coupons), or continue and pay the coupon for that period as well as future cash flows. The borrower pays in advance if the cash flow from the down payment is less than the coupon for that period and the expected expected value of future cash flows under the risk-free measure. We continue to back down until we get to the evaluation date. For each period, we track the value of each loan for each credit statement as a sum of the present value of future cash flows under the risk-neutral measure, provided that cash flows stop after a down payment. We thus treat the trajectory-based nature of the calculation by transforming a complex period choice problem into a matrix of two-period problems that can be solved by a backward induction.12 The results presented in Figure 13 show that the value of an advance option can be significant. In our EDF sample, 83% of long-term loans have an option value for advances greater than 1% of face value. In addition, the average value of the advance option is 6% of the face value.

It is useful to express the value of the loan in the form of an extension of Taylor`s second order: note 10. At this point, several remarks are correct. If there is only one plan; In other words, the sentence hypothesis is identical to that of theorem 3, since (71) is automatically satisfied.