Estimating the Market Value of Subsidies on Federal Loans and Loan Guarantees

Federal loans and guarantees are systematically undervalued in the federal budget, because budget rules mandate a zero price on market risk. This creates an incentive to overly rely on credit enhancement over other forms of assistance. This paper explores how options pricing techniques can be applied to assigning market values to certain federal guarantees, and uses guarantees on loans to Chrysler Corporation and America West Airlines as examples.