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On the Management of Financial Guarantees

Financial Management, Financial Management Association, Vol. 21, No. 4, Winter 1992

44 Pages Posted: 14 Sep 2009  

Robert C. Merton

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER); Harvard Business School - Finance Unit

Zvi Bodie

Boston University - Department of Finance & Economics

Date Written: 1992

Abstract

Guarantees of financial contracts, such as loans, deposit insurance, and swaps, pervade the financial system and play an important role in corporate and public finance. This paper develops a framework for analyzing the efficient management of such guarantees in both the private and public sectors. Within the private sector, it explores applications of guarantee management in non-financial corporations as well as financial institutions. Just as there are special advantages to having government rather than private entities provide guarantees, so there are special problems. The paper identifies these advantages and problems and explores some of the tradeoffs between government and private-sector solutions to the guarantee problem. A central point is that the principles for effective management of guarantees are the same, whether in the corporate, financial, or public sectors.

Suggested Citation

Merton, Robert C. and Bodie, Zvi, On the Management of Financial Guarantees (1992). Financial Management, Financial Management Association, Vol. 21, No. 4, Winter 1992. Available at SSRN: https://ssrn.com/abstract=1472693

Robert C. Merton

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

77 Massachusetts Avenue
E62-634
Cambridge, MA 02139-4307
United States
617 715 4866 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6678 (Phone)

Zvi Bodie (Contact Author)

Boston University - Department of Finance & Economics ( email )

United States

HOME PAGE: http://www.zvibodie.com

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