The Korean Economic Review
Valuing Income-Contingent Loans as Path-Dependent Options
Daehwan Kim (Konkuk University) and Jin-Yeong Kim (Konkuk University)Year 2011Vol. 27No. 2
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.