The Research of Option Pricing on Mortgage Loan

The author supposes lenders and borrowers possess identical information and similar beliefs about collateral future value. Using option-pricing techniques, we show that a secured loan contract is equivalent to a regular bond and an embedded option to the borrower to default. We finds that the lender will not advance to the borrower a loan that exceeds the market value of the collateral, and that the supply of loans increases with a rise in the market value of the collateral. Increases in the volatility of the value of the collateral, interest rate, and dividend rate of the collateral independently depress the loan supply