HUEI: Pricing a Chinese saving-borrowing pool

This paper tries to provide proper pricing methods for Traditional Huei Pool (THP), a very popular investment/borrowing vehicle in Taiwanese society. We find that THP equals the sum of a series of amortised loans by the “dead” members plus a newly formed THP by living members. If forming and terminating a THP is without any cost, it can be proven that the value of THP equals the discounted value of future payments by dead members. In addition, credit risk will increase the Huei discount and therefore will increase the funding cost for the Huei bidder.