Journal of Applied Finance & Banking

Feasibility Bounds for Option-Hedged BNPL Lending with Volatile Collateral

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• Abstract

   

  This paper derives and empirically evaluates algebraic feasibility bounds for option-hedged buy-now-pay-later (BNPL) lending secured by volatile collateral. In a merchant-fee-funded lending structure, the bounds identify loan-to-value ratios consistent with option strikes, observed put premiums, loan maturities, and a specified residual-loss budget. The framework encompasses over-protective, exact, and under-protective hedges and is applied to historical Deribit ETH put transactions and ETH spot prices from January 2021 to August 2025.

  Feasibility increases with merchant fees and is generally stronger at shorter maturities. Although many individual option observations fail the zero-loss screen, the option chain frequently contains at least one feasible quote on an observed date. Allowing bounded residual losses expands feasibility only modestly.

  An execution-price sensitivity analysis quantifies how increases in protection costs narrow feasible lending intervals and eliminate feasibility for some initially admissible options, with differences across maturities. Because historical closing prices represent last recorded transactions rather than verified executable ask quotations, these results assess historical price-based feasibility, not hedge executability.

  The framework provides an origination-time screening tool rather than a complete model of commercial lending profitability.

   

  JEL classification numbers: G13, G23.

  Keywords: Collateralized Lending, BNPL, Option hedging, Loan-to-value, Feasibility bounds, Volatile collateral.