Related papers: Collateralized CDS and Default Dependence
Bilateral CVA as currently implement has the counterintuitive effect of profiting from one's own widening CDS spreads, i.e. increased risk of default, in practice. The unified picture of CVA and liquidity introduced by Morini & Prampolini…
We depart from the usual methods for pricing contracts with the counterparty credit risk found in most of the existing literature. In effect, typically, these models do not account for either systemic effects or at-first-default contagion…
We study insolvency cascades in an interbank system when banks are allowed to insure their loans with credit default swaps (CDS) sold by other banks. We show that, by properly shifting financial exposures from one institution to another, a…
The collateral choice option allows a collateral-posting party the opportunity to change the type of security in which the collateral is deposited. Due to non-zero collateral basis spreads, this optionality significantly impacts asset…
The role of collateral in derivative pricing has evolved beyond credit risk mitigation, particularly following the global financial crisis, when funding costs and basis spreads became central to valuation practices. This development…
We propose a model for the credit markets in which the random default times of bonds are assumed to be given as functions of one or more independent "market factors". Market participants are assumed to have partial information about each of…
The paper studies derivative asset analysis in structural credit risk models where the asset value of the firm is not fully observable. It is shown that in order to compute the price dynamics of traded securities one needs to solve a…
The main result of this paper is a collateralized counterparty valuation adjusted pricing equation, which allows to price a deal while taking into account credit and debit valuation adjustments (CVA, DVA) along with margining and funding…
Diffusion in a linear potential in the presence of position-dependent killing is used to mimic a default process. Different assumptions regarding transport coefficients, initial conditions, and elasticity of the killing measure lead to…
This paper generalizes the framework for arbitrage-free valuation of bilateral counterparty risk to the case where collateral is included, with possible re-hypotecation. We analyze how the payout of claims is modified when collateral…
Changes in collateralization have been implicated in significant default (or near-default) events during the financial crisis, most notably with AIG. We have developed a framework for quantifying this effect based on moving between…
We give a comprehensive review of credit term structure modeling methodologies. The conventional approach to modeling credit term structure is summarized and shown to be equivalent to a particular type of the reduced form credit risk model,…
Bank behaviour is important for pricing XVA because it links different counterparties and thus breaks the usual XVA pricing assumption of counterparty independence. Consider a typical case of a bank hedging a client trade via a CCP. On…
This paper considers mutual obligations in the interconnected bank system and analyzes their influence on joint and marginal survival probabilities as well as CDS and FTD prices for the individual banks. To make the role of mutual…
This paper studies the stochastic modeling of market drawdown events and the fair valuation of insurance contracts based on drawdowns. We model the asset drawdown process as the current relative distance from the historical maximum of the…
We study the pricing problem for corporate defaultable bond from the viewpoint of the investors outside the firm that could not exactly know about the information of the firm. We consider the problem for pricing of corporate defaultable…
This article presents FVA and CVA of a bilateral derivative in a coherent manner, based on recent developments in fair value accounting and ISDA standards. We argue that a derivative liability, after primary risk factors being hedged,…
Our previous results are extended to the case of the margin account, which may depend on the contract's value for the hedger and/or the counterparty. The present work generalizes also the papers by Bergman (1995), Mercurio (2013) and…
In this paper, we introduce a model that adds a non-linearity to discounting: the discounting factor may depend on the notional (i.e., discounted values are no longer linear in the notional). In the first part of the paper, we provide a…
The research presented in this work is motivated by some recent papers regarding hedging and valuation of financial securities subject to funding costs, collateralization and counterparty credit risk. Our goal is to provide a sound…