1 Department of Business Studies, Aarhus School of Business, Aarhus BSS, Aarhus University2 Finance Research Group, Aarhus School of Business, Aarhus BSS, Aarhus University3 Department of Economics and Business Economics, Aarhus BSS, Aarhus University4 Department of Economics and Business Economics, Aarhus BSS, Aarhus University
An Asset Protection Scheme (APS) is a portfolio insurance contract; a credit derivative used as a tool to restore financial stability and reestablish economic confidence. Opposed to most governmental bailout packages implemented all over the world recently, the APS can be a fair market contract while retaining an appropriate structure of incentives. Within the structural credit risk modeling framework we apply two alternative structural multivariate default risk models, the classical Gaussian Black-Scholes-Merton model and a model based on Normal Inverse Gaussian (NIG) processes, e.g. Barndorf-Nielsen (1997). The Danish agricultural sector is an example of a financially troubled industry, which currently suffers under what appears to be the burst of a price bubble on farmland. Using a unique data set on yearly, farm level data from 2003 to 2009 we form an agricultural loan portfolio, which will serve as the underlying in the valuation of the corresponding APS in order to demonstrate the applicability of the APS as a regulatory tool. The contribution to the financial literature on credit risk is the empirical analysis of agricultural loans using our unique data set. The contribution to the banking literature is the suggestion of how to use the specific type of credit derivative in a manner which retains an appropriate structure of incentives for banks to tend and maintain their loan portfolios. Finally, the contribution to the Danish society is a specific suggestion of how to address the serious problems concerning the financial side of the agricultural sector.
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14th International Congress on Insurance: Mathematics and Economics (IME), 2010