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Understanding Lending as the Sale of Put Options on Collateral

September 28, 2009
Shane B. Hoover, Adam C. Buresh

Managing risk and reward is at the heart of disciplined investing. Over the years Performance Trust UniversityTM and this newsletter have discussed bonds with embedded optionality, such as callable agencies. Rarely, however, have we discussed the optionality embedded in loans. This Disciplined Investor® will show that collateralized lending is similar to selling put options and will use the comparison to make important points about lending.

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