Property-Development Default Swaps: An Option Pricing Model to Assess the Risk associated to Bank Loans to the Real Estate Sector in Spain.

Resumen

Property-related assets, along with sovereign debt, are the main burden for the balances of the Spanish Banking sector. This paper proposes a real-option approach to properly value the risk associated to loans to the property promoters. Banks could protect the loans to housing development projects by charging a premium based on the value of the real option associated to the project.