scholarly journals The Valuation of Financial Derivatives Subject to Counterparty Risk and Credit Value Adjustment

2020 ◽  
Author(s):  
Tim Xiao
Keyword(s):  
Credit Risk ◽  
Market Value ◽  
Financial Derivatives ◽  
Generic Model ◽  
Backward Induction ◽  
Counterparty Risk ◽  
Credit Risks ◽  
Common Mistake ◽  
Counterparty Credit Risk ◽  
American Style

This article presents a generic model for pricing financial derivatives subject to counterparty credit risk. Both unilateral and bilateral types of credit risks are considered. Our study shows that credit risk should be modeled as American style options in most cases, which require a backward induction valuation. To correct a common mistake in the literature, we emphasize that the market value of a defaultable derivative is actually a risky value rather than a risk-free value. Credit value adjustment (CVA) is also elaborated. A practical framework is developed for pricing defaultable derivatives and calculating their CVAs at a portfolio level.

scholarly journals The Valuation of Financial Derivatives Subject to Counterparty Risk and Credit Value Adjustment

2020 ◽  
Author(s):  
Tim Xiao
Keyword(s):  
Credit Risk ◽  
Market Value ◽  
Financial Derivatives ◽  
Generic Model ◽  
Backward Induction ◽  
Counterparty Risk ◽  
Credit Risks ◽  
Common Mistake ◽  
Counterparty Credit Risk ◽  
American Style

This article presents a generic model for pricing financial derivatives subject to counterparty credit risk. Both unilateral and bilateral types of credit risks are considered. Our study shows that credit risk should be modeled as American style options in most cases, which require a backward induction valuation. To correct a common mistake in the literature, we emphasize that the market value of a defaultable derivative is actually a risky value rather than a risk-free value. Credit value adjustment (CVA) is also elaborated. A practical framework is developed for pricing defaultable derivatives and calculating their CVAs at a portfolio level.

scholarly journals The Valuation of Financial Derivatives Subject to Counterparty Risk and Credit Value Adjustment

2019 ◽  
Author(s):  
David Lee
Keyword(s):  
Credit Risk ◽  
Market Value ◽  
Financial Derivatives ◽  
Generic Model ◽  
Backward Induction ◽  
Counterparty Risk ◽  
Credit Risks ◽  
Common Mistake ◽  
Counterparty Credit Risk ◽  
American Style

This article presents a generic model for pricing financial derivatives subject to counterparty credit risk. Both unilateral and bilateral types of credit risks are considered. Our study shows that credit risk should be modeled as American style options in most cases, which require a backward induction valuation. To correct a common mistake in the literature, we emphasize that the market value of a defaultable derivative is actually a risky value rather than a risk-free value. Credit value adjustment (CVA) is also elaborated. A practical framework is developed for pricing defaultable derivatives and calculating their CVAs at a portfolio level.

scholarly journals The Valuation of Financial Derivatives Subject to Counterparty Risk and Credit Value Adjustment

2019 ◽  
Author(s):  
Tim Xiao
Keyword(s):  
Credit Risk ◽  
Market Value ◽  
Financial Derivatives ◽  
Generic Model ◽  
Backward Induction ◽  
Counterparty Risk ◽  
Credit Risks ◽  
Common Mistake ◽  
Counterparty Credit Risk ◽  
American Style

This article presents a generic model for pricing financial derivatives subject to counterparty credit risk. Both unilateral and bilateral types of credit risks are considered. Our study shows that credit risk should be modeled as American style options in most cases, which require a backward induction valuation. To correct a common mistake in the literature, we emphasize that the market value of a defaultable derivative is actually a risky value rather than a risk-free value. Credit value adjustment (CVA) is also elaborated. A practical framework is developed for pricing defaultable derivatives and calculating their CVAs at a portfolio level.

scholarly journals The Valuation of Financial Derivatives Subject to Counterparty Risk and Credit Value Adjustment

2019 ◽  
Author(s):  
Tim Xiao
Keyword(s):  
Credit Risk ◽  
Market Value ◽  
Financial Derivatives ◽  
Generic Model ◽  
Backward Induction ◽  
Counterparty Risk ◽  
Credit Risks ◽  
Common Mistake ◽  
Counterparty Credit Risk ◽  
American Style

This article presents a generic model for pricing financial derivatives subject to counterparty credit risk. Both unilateral and bilateral types of credit risks are considered. Our study shows that credit risk should be modeled as American style options in most cases, which require a backward induction valuation. To correct a common mistake in the literature, we emphasize that the market value of a defaultable derivative is actually a risky value rather than a risk-free value. Credit value adjustment (CVA) is also elaborated. A practical framework is developed for pricing defaultable derivatives and calculating their CVAs at a portfolio level.

Part III Investment Banking, 15 Counterparty Risk in the Trading Book

2018 ◽  
Author(s):  
Gleeson Simon
Keyword(s):  
Credit Risk ◽  
Market Value ◽  
Investment Banking ◽  
Future Price ◽  
Counterparty Risk ◽  
The Future ◽  
Counterparty Credit Risk ◽  
Degree Of Risk ◽  
Rules Set ◽  
Level Of Risk

This chapter sets out rules that result in certain exposures being treated as having a greater degree of risk than their actual mark to market value. In order to explain this, consider a bank which owns 100 of shares in A, but also has a derivative in place with X under which it is entitled to be paid the value of 100 shares in A. Both positions give rise to the same risk as to the future price of A, and both will be valued by reference to the value of the shares in A. However, if the value of the shares in A increases, the bank's credit exposure to X will increase. The rules set out in this chapter seek to capture this extra level of risk by treating the value of the derivative as being slightly higher than its mark to market value; thereby requiring a slightly higher level of capital to be held against it. This is the counterparty credit risk requirement (CCR).

scholarly journals Pricing Financial Derivatives Subject to Multilateral Credit Risk and Collateralization

2019 ◽  
Author(s):  
Tim Xiao
Keyword(s):  
Asset Pricing ◽  
Credit Risk ◽  
Financial Markets ◽  
Default Risk ◽  
Credit Default Swap ◽  
Financial Derivatives ◽  
Counterparty Risk ◽  
Financial Contracts ◽  
Credit Default ◽  
Default Swap

This article presents a new model for valuing financial contracts subject to credit risk and collateralization. Examples include the valuation of a credit default swap (CDS) contract that is affected by the trilateral credit risk of the buyer, seller and reference entity. We show that default dependency has a significant impact on asset pricing. In fact, correlated default risk is one of the most pervasive threats in financial markets. We also show that a fully collateralized CDS is not equivalent to a risk-free one. In other words, full collateralization cannot eliminate counterparty risk completely in the CDS market.

scholarly journals Influence of credit risk on shareholder market value of commercial banks listed in Nairobi Securities Exchange

2020 ◽  
Vol 9 (2) ◽  
pp. 107-117
Author(s):  
Kellen Kiambati
Keyword(s):  
Credit Risk ◽  
Mixed Method ◽  
Commercial Banks ◽  
Null Hypothesis ◽  
Market Value ◽  
Qualitative Approach ◽  
Causal Mechanism ◽  
Concurrent Design ◽  
Credit Risks ◽  
Method Approach

This study examines the influence of credit risk on the shareholder market value of commercial banks listed in the Nairobi Securities Exchange. A mixed-method approach and concurrent design were used in this study. Logistic regression was performed to ascertain the influence of credit risk on shareholder market value of commercial banks listed in the Nairobi Securities Exchange as a quantitative method and processes tracing as a qualitative approach to trace the causal mechanism by which credit risk contributes to shareholder market value. This research demonstrated that (i)there is a relationship between credit risk and shareholder market value among the commercial banks listed in NSE; (ii) Wald (1) =41.475, p=.000, sig<.05, 2-tailed is below the permissible value of likelihood above which null hypothesis is accepted. The study concludes that there is a relationship between credit risks and Shareholders Market Value in commercial banks listed in NSE. 

The Role of the Standardized Approach to Measuring the Counterparty Credit Risk Exposures (Basel III) in Order to Create Conditions for Russia’s Economic Growth

2019 ◽  
Vol 12 (3) ◽  
pp. 144-153
Author(s):  
I. E. Shaker
Keyword(s):  
Economic Growth ◽  
Credit Risk ◽  
Economies Of Scale ◽  
Positive Impact ◽  
International Standards ◽  
Public Confidence ◽  
Basel Iii ◽  
Credit Risks ◽  
Counterparty Credit Risk ◽  
System Risk

The subject of the researchis the Standardized Approach to measuring the Counterparty Credit Risk (SA-CCR) exposures according to the reform of the international standards of macroprudential regulation to ensure a breakthrough in the scientific, technological and socio-economic development of Russia. The purposeof the research was to assess the introduction and use of the post-crisis Basel III standard until 2021 to create financially sound credit and banking institutions as the main triggers of the system risk in order to maintain public confidence in the financial system and ensure sustainable economic growth. The paper examines the prospects for the implementation of the Basel III standard, taking into account the standardized approach to measuring the counterparty credit risk to meet the challenges of Russia’s entry into the top five world economies.Given the global financial market conditions, the economic growth is ensured by the economies of scale as well as by harmonization of structural macroprudential rules in different countries, which requires an international standardized approach to system risk management when macro-prudential policies are aimed at alleviating credit risks thereby having a positive impact on the economic growth.The effectiveness of the macro-prudential policy for banks is reduced when less regulated financial intermediaries increase the market share and openness allowing organizations and households to receive money from foreign financial sources.The paper concludesthat in shaping the country’s macro-prudential policies, it is necessary to assess the relative importance of each channel of manifestation and transformation of the system risk and its impact on the economic growth in the national economy.

scholarly journals Pricing Financial Derivatives Subject to Multilateral Credit Risk and Collateralization

2019 ◽  
Author(s):  
Tim Xiao
Keyword(s):  
Asset Pricing ◽  
Credit Risk ◽  
Financial Markets ◽  
Default Risk ◽  
Credit Default Swap ◽  
Financial Derivatives ◽  
Counterparty Risk ◽  
Financial Contracts ◽  
Credit Default ◽  
Default Swap

This article presents a new model for valuing financial contracts subject to credit risk and collateralization. Examples include the valuation of a credit default swap (CDS) contract that is affected by the trilateral credit risk of the buyer, seller and reference entity. We show that default dependency has a significant impact on asset pricing. In fact, correlated default risk is one of the most pervasive threats in financial markets. We also show that a fully collateralized CDS is not equivalent to a risk-free one. In other words, full collateralization cannot eliminate counterparty risk completely in the CDS market.

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