I need to price one exotic option embedded in a loan. Our loan pays CDOR + 100BP spread to us and that loan has embedded option to redeem in American style. The loan is packaged SPV quoted AAA. The strike price is CDOR + 100BP; when the company can find better financing will redeem that debt and will refinance with lower cost. Even that the market, price that loan at CDOR + 85BP (in the money for the company) the company doesn?t call that because is unable to refinance at better cost.How can I price this kind of option?Intuitively I can arbitrarily fix a strike at 75 to penalise their capacity to refinance. But how to determine this new strike? Is that the right way ? Any other idea?Thank you

"price that loan at CDOR + 85BP (in the money for the company) the company doesn?t call that because is unable to refinance at better cost."This statement feels like a contradiction. The price of new funding cannot be CDOR + 85 if the company can not refinance at that rate. The price of a loan is whatever the company CAN refinance at in practice.Given that the issuer is an SPV, the primary factors for senior funding cost will be the market value of the underlying assets (+ correlation), and the cost of capital for sub debt (if any), combined with general funding mood of the market.Usually when you have a call option on senior debt issued by an SPV, the call will only be exercised to collapse the structure, i.e. sell all assets, pay all debt and pay remainder to equity. Structures are generally not collapsed (voluntarily) unless value of assets is more than liabilities. So you could look at this option as a short call on the underlying assets struck at the par value of liabilities. (or get more advanced and take into account funding cost vs. asset dividends and model this as a Bermudan)(the only reason to actually refinance would be if senior refinancing costs were low compared to original, but sub-costs higher. Probably an unlikely scenario)

Those two things don't make sense, if the issue is trading tighter than what the company has it on the balance sheet as (100 over), it obviously can find financing for under 100 over(and thus call the issue)Are you sure the difference isn't due to small $ balance, where the revolving costs are more than the 15bp difference?

In normal condition the company will call when can refinance at better price. Actually our client pay CDOR +100BP and doesn't call even if the market price that loan at CDOR + 85 bp. Why the company doesn't call? Is not in our interest to sell on market price at CDOR +85BP beacuse is in our interest, I want just to price that. Hope that help you to better understand. Tks

In fact the company can call this loan (debt) and issue another cheaper at CDOR +85BP. It seems like that company have the difficulties to refinance on the market price.

Not quite sure what you meant "....the market price that loan at CDOR + 85BP ". How do you get this market quote? Is it the same loan with embedded option you are referring to ? If it is just a pure loan without the embedded option, this company doesnt call may be because it might want to keep this embedded option which allows it to stop his borrowing at the right time that it wants. For example this company is expecting that some cash that it might be able to receive in the near future and it doesnt need to close this deal and borrow anymore. So that extra bp is more like the premium that it is willing to pay for this optionality. Now if the market quote that you referred to is from other similar company whose packeted with SPV quoted AAA, then it means that this company is really having a problem for the refinacing. To price this product, you can just simple use any callable bond option pricing method.