International Journal of Business Policy and Strategy Management
| Volume 4, No. 1, 2017, pp 21-26 | ||
| Abstract |
Non-recourse Right Pricing of Mortgage Loan by Black-Scholes Option Pricing Model
|
|
Abstract
A non-recourse mortgage loan is a loan product where the collection of creditors is limited to the mortgage asset. Therefore, the debtor can defend his or her other assets from the exercise of recourse right by the creditors, while the interest rate must rise as much as the value of the non-recourse right. In the present study, the Black-Scholes (1973) option model was applied to estimate the economic value of the non-recourse right, taking into account the fact that the nonrecourse right inherent in non-recourse mortgage loan is a put option where the loan balance is the exercise price. As a result, it was found that the value of the non-recourse right has a positively relationship with major variables of mortgage loan such as the loan to value ratio (LTV), volatility. These results were in line with the theoretical predictions based on BlackScholes (1973) option model.