Pricing Intra-day Credit in Real Time Gross Settlement Systems

Some Real Time Gross Settlement (RTGS) systems require the explicit provision of intra-day liquidity. This can be provided through either collateralised or unsecured overdraft facilities. In the United States, the Federal Reserve has introduced a fee on daylight overdrafts in its RTGS system (Fedwire) since April 1994 in order to reduce the amount of such overdrafts. 

This paper proposes a method to price unsecured intra-day credit (overdraft facilities) in RTGS systems based on the isomorphic correspondence between these credit extensions and common stock put options. 

Some sense of the magnitude implied by this framework is also developed. 

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