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2021 | Book

Motivation Read chapter Read first chapter

Pricing Export Credit

A Concise Framework with Examples and Implementation Code in R

Author: Claudio Franzetti

Publisher: Springer International Publishing

Book Series : Management for Professionals

Part of: Springer Professional "Wirtschaft+Technik" , Springer Professional "Wirtschaft"

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About this book

Pricing of export credit is a challenge in the globalised world trade. Annual premia represent billions of euros or dollars and may determine competition. This book develops a rigorous new framework for pricing export credit products, e.g. buyer and supplier credit insurance and performance and working capital guarantees , based on well-known financial and actuarial theories. It introduces the products, the theories and the different data sources in order to apply the mathematical and financial ideas, e.g. discounting, risk-neutral valuation and Merton type defaults. It shows the differences of historical experience and implicit market pricing assumptions. The well-known OECD Arrangement is used as a benchmark for some part of the framework. Short code snippets in R are given in order to re-perform the results and have a basis to try own ideas. Many unprecedented exhibits give new insights into the subject matter. The book is targeted at practitioners and actuaries in the field with a good quantitative background.

Table of Contents

Frontmatter
1. Motivation
Abstract
This chapter is actually about two motivations. Why is there and should be export support, and having answered that, why a comprehensive pricing framework is needed. To anticipate the second: globalisation and the advent and raise of new players in production and export put pressure on old agreements of the main players of the past. The new situation must be reflected in such an important framework.
Claudio Franzetti
2. Export Credit Industry
Abstract
In this chapter we would like to summarise basic knowledge of export, trade finance, that is bank products, export credit agency products and credit as well as fundamentals of finance and its core concepts.
Claudio Franzetti
3. Insurance Background
Abstract
Insurance as a tool rests upon two pillars, a juristic and a statistic. Jurist has developed over the centuries a heavy body of rules and philosophies. Utmost good faith is such a stronghold. It requires all parties to reveal any information that could feasibly influence their decision to enter into a contract. Applicants for cover are legally obliged to present all material and known facts truthfully. Material misrepresentation can void the contract, i.e. the insurance policy.
Claudio Franzetti
4. Finance Fundamentals
Abstract
We would like to be as brief as possible, nonetheless laying the groundwork for later use in the pricing section or other calculations. We touch credit risk, interest rates, yields, risk-neutral probabilities and the Merton model in addition to default rates and recovery as well as risk assessment.
Claudio Franzetti
5. Preliminaries
Abstract
This chapter is a preparation and a context for later analysis. It gives a brief account of the pricing of the OECD Arrangement that rules a certain layer of international trade, i.e. export on middle-long term. Some features are analysed to certain extent in order to show some concepts in pricing that we find problematic.
Claudio Franzetti
6. New Premium Framework
Abstract
We want to build our comprehensive pricing methodology for credit insurance on principles which we present as propositions. By doing so we hope to convince the reader of the soundness of the approach or to channel criticism to the point.
Claudio Franzetti
7. Historic Default Rates
Abstract
The new framework of the preceding chapter needs pertinent probability of default. Now both pertinence and probability need to be defined and assessed.
Claudio Franzetti
8. Market Version of the Framework
Abstract
Insurance pricing rests either on empirical data that assumes to a certain extent that the underlying structure has some stability over time and thus is a valid predictor for the future. Or, data for pricing may be extracted from traded instruments that derive their price from the market, which in turn is the will and subjective estimate of the party to the instrument or agreement. In this chapter we apply the framework to input data from the market.
Claudio Franzetti
9. Minimum Interest Calculation
Abstract
As we have already mentioned there are governmental credit institutions or export credit agencies that offer the so-called pure cover while others do also direct lending. The third variant is that a state owned bank does the funding and the ECA contributes the cover.
Claudio Franzetti
10. Comparison with OECD Arrangement
Abstract
We compare different features of the OECD Arrangement with our framework. It becomes evident that some features of the minimum pricing are somewhat obscure and may stem from a political process of compromise.
Claudio Franzetti
11. Other Pricing
Abstract
This chapter is intended to convey some preliminary ideas on the topic of pricing other structures than classical credit of loan type. Concerning common knowledge and literature to these themes is rather scarce. This is due on the one hand to a highly competitive situation and on the other hand to a lack of empirical data. A third reason is the fact that private credit insurance sticks to the traditional business model of relationship. This implies that insurer and insured follow each other through good and rough times and insureds do not jump ship at every occasion. Therefore the pricing will show typical cycles where bad times are followed by increasing premia.
Claudio Franzetti
12. Conclusions
Abstract
From the discussion so far it seems quite improbable that the pricing of OECD Arrangement can further be used in an OECD that is under siege by different sources. Moreover, it is inadequate to attract the new exporters that have not been part of the OECD. There are several points of attack.
Claudio Franzetti
Backmatter
Metadata
Title
Pricing Export Credit
Author
Claudio Franzetti
Copyright Year
2021
Electronic ISBN
978-3-030-70285-4
Print ISBN
978-3-030-70284-7
DOI
https://doi.org/10.1007/978-3-030-70285-4