Counterparty Risk Pricing under Correlation between Default and Interest Rates

2007 ◽  
pp. 63-81 ◽  
Author(s):  
Damiano Brigo ◽  
Andrea Pallavicini
Keyword(s):  
Interest Rates ◽  
Counterparty Risk ◽  
Risk Pricing

scholarly journals An Investigation into the Fundamental Drivers of Pricing of Residential Mortgage Products – A Risk Pricing Viewpoint

2010 ◽  
Vol 10 (4) ◽  
pp. 60-72
Author(s):  
Harry M Karamujic
Keyword(s):  
Financial Crisis ◽  
Interest Rates ◽  
Financial Institutions ◽  
Global Financial Crisis ◽  
Exact Science ◽  
Residential Mortgage ◽  
Risk Pricing ◽  
Price Risks ◽  
The Global Financial Crisis ◽  
Underlying Theme

Residential mortgage products (also known as home loans) pricing has been long understood to be something of a ‘dark art’, requiring judgment and experience, rather than being an exact science. In the last decade, a lot has changed in this field and more and more lenders, primarily the larger lenders, are increasingly looking to make their pricing as exact as possible. Even so, inadequate pricing of residential mortgage products (in particular its substandard risk pricing) has been seen as one of major causes of the global financial crisis (GFC) and subsequent spectacular banking collapses. The underlying theme of the paper is to exhibit how contemporary lenders, in practice, price their residential mortgage products. While discussing elements of the pricing calculation particular attention was given to the exposition of how contemporary lenders price risks involved in providing home loans. Because of the importance of Basel capital accords to how financial institutions assess and quantify their risks, the paper provides an overview of Basel capital accords. The author envisages that the paper will (i) help enhance comprehension of the underlying elements of the pricing calculation and the ways in which these elements relate to each other, (ii) scrutinize how contemporary lenders identify and quantify risks and (iii) improve consciousness of future changes in interest rates

Derivatives

2019 ◽  
pp. 157-198
Author(s):  
Alan N. Rechtschaffen
Keyword(s):  
Interest Rates ◽  
Foreign Currency ◽  
Credit Derivatives ◽  
Counterparty Risk ◽  
Treasury Bonds ◽  
Over The Counter ◽  
Futures Options ◽  
Counterparty Credit Risk ◽  
Stock Indexes ◽  
Versus Exchange

Derivatives provide a means for shifting risk from one party to a counterparty that is more willing or better able to assume that risk. The counterparty's motivation for assuming that risk might be to manage its own risk or to enhance yield (make money). Derivatives transactions may be based on the value of foreign currency, U.S. Treasury bonds, stock indexes, or interest rates. There are four types of derivatives contracts: forwards, futures, swaps, and options. This chapter discusses the following: counterparty credit risk, over-the-counter versus exchange-traded derivatives, shifting risk, types of derivatives, reduction of counterparty risk, suitability as hedging instruments, distinction between forwards and futures, foreign exchange forwards and futures, options, characteristics of swaps, and credit derivatives.

Corona, command and capitalism

2020 ◽  
Vol 10 (3) ◽  
pp. 1-8
Author(s):  
Michael Ward
Keyword(s):  
Interest Rates ◽  
Public Good ◽  
Global Financial Crisis ◽  
Central Banks ◽  
Economic Consequences ◽  
Web Based ◽  
Content Type ◽  
The Public ◽  
Academic Level ◽  
Risk Pricing

Learning outcomes The case presents a lot of information, directly and via references and Web-based links, about the economic consequences of the virus. Several themes are evident: As an opening theory-base, the decades-long stakeholder versus shareholder debate is invoked – but does this extend beyond “stakeholders” to the “public good”? There are contexts (generally wars) in which governments are empowered to instruct private companies to engage in the public good – but how far should/must they voluntarily go? The underlying macro-economic issue is: where will we get the capital? Central banks have not recovered from the 2008 global financial crisis and have limited “ammunition” to address the anticipated economic problems introduced by the virus. The case presents data on selected financial metrics (interest rates, debt levels, risk pricing, etc.) and outlines the conventional stimulatory steps used: lowering short-term rates (monetary policy) and investment in assets (fiscal policy) and the less-conventional Quantitative Easing “QE”. Case overview/synopsis The coronavirus appears to herald a devastating blow to lives and to the world economy – its impact is yet unknown, but likely to be comparable to war and pestilence of biblical proportion. This case focuses on the possible economic trajectories as a consequence of the virus, with emphasis on bailing-out (restructuring) struggling companies and restoring jobs. Within the framework of a world desperately in need of capital, it raises questions about accountability and responsibility. Should retrenched workers in restaurants, banks and airlines feel the consequences of their poor career choices? Must shareholders (read pensioners) shoulder losses to support the public good? Ought governments bail-out whole industries – using tax-payer money? Or do we allow central banks to conjure-up billions and hope for the best? The case does not attempt to provide answers to these questions but presents several vignettes and offers a context in which participants can debate the merits of these problems. Complexity academic level MBA and Exec-ed. Supplementary materials Teaching Notes are available for educators only. Subject code CSS: 1 Accounting and Finance.

scholarly journals COUNTERPARTY RISK PRICING: IMPACT OF CLOSEOUT AND FIRST-TO-DEFAULT TIMES

2012 ◽  
Vol 15 (06) ◽  
pp. 1250039 ◽  
Author(s):  
DAMIANO BRIGO ◽  
CRISTIN BUESCU ◽  
MASSIMO MORINI
Keyword(s):  
Counterparty Risk ◽  
Contagion Effect ◽  
Default Time ◽  
Pricing Error ◽  
Risk Pricing ◽  
Credit Valuation Adjustment ◽  
Default Contagion ◽  
The Impact

In the absence of a universally accepted procedure for the credit valuation adjustment (CVA) calculation, we compare a number of different bilateral counterparty valuation adjustment (BVA) formulas. First we investigate the impact of the choice of the closeout convention used in the formulas. Important consequences on default contagion manifest themselves in a rather different way depending on which closeout formulation is used (risk-free or replacement), and on default dependence between the two entities in the deal. Second we compare the full bilateral formula with an approximation that is based on subtracting two unilateral credit valuation adjustment (UCVA) formulas. Although the latter might be attractive for its instantaneous implementation once one has a unilateral CVA system, it ignores the impact of the first-to-default time, when closeout procedures are ignited. We illustrate in a number of realistic cases both the contagion effect due to the closeout convention, and the CVA pricing error due to ignoring the first-to-default time.

ARBITRAGE-FREE VALUATION OF BILATERAL COUNTERPARTY RISK FOR INTEREST-RATE PRODUCTS: IMPACT OF VOLATILITIES AND CORRELATIONS

2011 ◽  
Vol 14 (06) ◽  
pp. 773-802 ◽  
Author(s):  
DAMIANO BRIGO ◽  
ANDREA PALLAVICINI ◽  
VASILEIOS PAPATHEODOROU
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Default Risk ◽  
Net Present Value ◽  
Credit Spread ◽  
Counterparty Risk ◽  
Put Option ◽  
Underlying Risk Factor ◽  
Credit Valuation Adjustment ◽  
Future Work

The purpose of this paper is introducing rigorous methods and formulas for bilateral counterparty risk credit valuation adjustment (CVA) on interest-rate portfolios. In doing so, we summarize the general arbitrage-free valuation framework for counterparty risk adjustments in presence of bilateral default risk, including the default of the investor. We illustrate the symmetry in the valuation and show that the adjustment involves a long position in a put option plus a short position in a call option, both with zero strike and written on the residual net present value of the contract at the relevant default times. We allow for correlation between the default times of the investor and counterparty, and for correlation of each with the underlying risk factor, namely interest rates. We also analyze the often neglected impact of credit spread volatility. We include close-out netting rules in our examples, although other agreements, such as periodic margining or collateral posting, are left for future work.

Economic effects of monetary policy in Russia: What do large datasets tell us?

2020 ◽  
pp. 31-53 ◽  
Author(s):  
Anna A. Pestova ◽  
Natalia A. Rostova
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
Economic Activity ◽  
Global Financial Crisis ◽  
Exchange Rate Regime ◽  
Aggregate Demand ◽  
Economic Effects ◽  
Theoretical Concepts ◽  
Empirical Estimates

Is the Bank of Russia able to control inflation and, at the same time, manage aggregate demand using its interest rate instruments? In other words, are empirical estimates of the effects of monetary policy in Russia consistent with the theoretical concepts and experience of advanced economies? This paper is aimed at addressing these issues. Unlike previous research, we employ “big data” — a large dataset of macroeconomic and financial data — to estimate the effects of monetary policy in Russia. We focus exclusively on the period after the 2008—2009 global financial crisis when the Bank of Russia announced the abandoning of its fixed ruble exchange rate regime and started to gradually transit to an interest rate management. Our estimation results do not confirm standard responses of key economic activity and price variables to tightening of monetary policy. Specifically, our estimates do not reveal a statistically significant restraining effect of the Bank of Russia’s policy of high interest rates on inflation in recent years. At the same time, we find a significant deteriorating effect of the monetary tightening on economic activity indicators: according to our conservative estimates, each of the key rate increases occurred in March and December 2014 had led to a decrease in the industrial production index by about 0.2 percentage points within a year.

Perspectives on inflation Targeting Regime in Russia

2014 ◽  
pp. 107-121 ◽  
Author(s):  
S. Andryushin
Keyword(s):  
Monetary Policy ◽  
Financial Markets ◽  
Interest Rates ◽  
Inflation Targeting ◽  
Short Term ◽  
Indirect Control ◽  
Financial Account ◽  
Domestic Prices ◽  
Macroeconomic Indicators ◽  
Private And Public

The paper analyzes monetary policy of the Bank of Russia from 2008 to 2014. It presents the dynamics of macroeconomic indicators testifying to inability of the Bank of Russia to transit to inflation targeting regime. It is shown that the presence of short-term interest rates in the top borders of the percentage corridor does not allow to consider the key rate as a basic tool of monetary policy. The article justifies that stability of domestic prices is impossible with-out exchange rate stability. It is proved that to decrease excessive volatility on national consumer and financial markets it is reasonable to apply a policy of managing financial account, actively using for this purpose direct and indirect control tools for the cross-border flows of the private and public capital.

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