Hey guys, in the curriculum they say that if the borrowing is non-recourse, it is equivalent to a put option.
How exactly?
If you dont want to repay the loan you just don’t and lose only the financed asset and to nothing else.
So have have an option to “sell” (or in this case just forfeit to the bank) the asset to the bank.
Ok, so as I understand I can reject to reimburse the debt and I leave the value of the asset. So I theoretically can keep the loan amount. But isn’t it likely that the bank goes to court and asks to be given back the residual amount? (e.g.: I do a LTV of 70% with the value of my home 10 milion, so I get 7 M that I invest in cash securities and roll them upon debt maturity. Now let’s suppose at debt maturity the home value is 5 M, so I put the home and I gain 2 M + earned interest: isn’t the bank going to ask for those 2 M?)
No, here the non-recourse clause comes to play, bank cannot get more than the home.
Great! Thanks for all the answers! Just last question: I imagine that the option comes at a cost: either I get a lower LTV or I get a higher interest rate on the loan, correct?