Option Pricing Theory and Game Theory - A Comparison of Credit Risk Management Tools

Abstract

The purpose of this article is to determine whether the theoretical models derived from option pricing theory and game theory correctly determine the interest rate on bank loans. First, the interest rates were calculated from the option model developed by Moody's-KMV. Obtained in this way, interest rates were compared with the real interest rate on bank loans of Polish publicly listed companies. It turns out that the theoretical interest rate is generally much lower than the actual one. A model built on the basis of the game theory and the concept of the liquidation value was then used, and on that basis theoretical interest rates were calculated using Monte Carlo simulation. In this case, divergence of the theoretical loan rates from the actual ones also proved significant. It seems that, in setting interest rates, Polish banks use many factors, not only the market values of company assets and their volatility.