Deborah Lucas, Marvin Phaup, and Ravi Prasad
This paper provides more detail about the methods used in the Congressional Budget Office (CBO) study, “Estimating Subsidies for Federal Loans and Guarantees,” (August 2004). That study estimates the market value of loans and loan guarantees under both credit reform and risk-adjusted approaches. The purpose of this paper is to increase the transparency of those methods for analysts who may wish to adopt them. Although this paper includes a brief overview of the basics, it is not a substitute for a textbook on options pricing. Rather, the discussion focuses on instances where the standard models were modified to better reflect the terms of the AWA and Chrysler guarantees.