Anderson Graduate School of Management
UC Los Angeles
Title:
The Pricing of Sovereign Risk: An Application of Option Theory
Author:
Bossaerts, Peter
Publication Date:
08-01-1985
Series:
Finance
Publication Info:
UC Los Angeles, Finance, Anderson Graduate School of Management
Permalink:
http://escholarship.org/uc/item/4gv6t3hb
Citation:
Bossaerts, Peter. (1985). The Pricing of Sovereign Risk: An Application of Option Theory. UC Los
Angeles: Anderson Graduate School of Management. Retrieved from: http://escholarship.org/uc/
item/4gv6t3hb
Abstract:
<p>Option theory is used here to determine the variables that should explain the price of bank
loans to foreign governments. As usual, the key explanatory variable is the variance of the
underlying state variable (in casu, government income). It is also shown that these bank loans
can often be considered to be riskless in the quantity dimension, because repayment will be made
with certainty. They are risky in the time dimension, however, in the sense that banks do not know
with certainty the exact moment of repayment. </p>
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