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Restructuring counterparty credit risk

Restructuring counterparty credit risk
Restructuring counterparty credit risk
We introduce an innovative theoretical framework for the valuation and replication of derivative transactions between defaultable entities based on the principle of arbitrage freedom. Our framework extends the traditional formulations based on credit and debit valuation adjustments (CVA and DVA). Depending on how the default contingency is accounted for, we list a total of ten different structuring styles. These include bi-partite structures between a bank and a counterparty, tri-partite structures with one margin lender in addition, quadri-partite structures with two margin lenders and, most
importantly, configurations where all derivative transactions are cleared through a central counterparty clearing house (CCP). We compare the various structuring styles under a number of criteria including consistency from an accounting standpoint, counterparty risk hedgeability, numerical complexity, transaction portability upon default, induced behaviour and macro-economic impact of the implied wealth allocation.
counterparty risk, credit risk, credit valuation adjustment, counterparty risk restructuring, cva restructuring, dva, margin lending, collateral
0219-0249
1350010-[29pp]
Albanese, Claudio
f6db2dca-5632-4bc0-ac1f-d61acdb61a3f
Brigo, Damiano
9414c724-1aa5-4163-8c34-dae78ee61c78
Oertel, Frank
5026be9a-a787-477f-bf94-23c72bd08ef5
Albanese, Claudio
f6db2dca-5632-4bc0-ac1f-d61acdb61a3f
Brigo, Damiano
9414c724-1aa5-4163-8c34-dae78ee61c78
Oertel, Frank
5026be9a-a787-477f-bf94-23c72bd08ef5

Albanese, Claudio, Brigo, Damiano and Oertel, Frank (2013) Restructuring counterparty credit risk. International Journal of Theoretical and Applied Finance, 1350010-[29pp]. (doi:10.1142/S0219024913500106).

Record type: Article

Abstract

We introduce an innovative theoretical framework for the valuation and replication of derivative transactions between defaultable entities based on the principle of arbitrage freedom. Our framework extends the traditional formulations based on credit and debit valuation adjustments (CVA and DVA). Depending on how the default contingency is accounted for, we list a total of ten different structuring styles. These include bi-partite structures between a bank and a counterparty, tri-partite structures with one margin lender in addition, quadri-partite structures with two margin lenders and, most
importantly, configurations where all derivative transactions are cleared through a central counterparty clearing house (CCP). We compare the various structuring styles under a number of criteria including consistency from an accounting standpoint, counterparty risk hedgeability, numerical complexity, transaction portability upon default, induced behaviour and macro-economic impact of the implied wealth allocation.

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e-pub ahead of print date: 2013
Keywords: counterparty risk, credit risk, credit valuation adjustment, counterparty risk restructuring, cva restructuring, dva, margin lending, collateral
Organisations: Mathematical Sciences

Identifiers

Local EPrints ID: 350394
URI: https://eprints.soton.ac.uk/id/eprint/350394
ISSN: 0219-0249
PURE UUID: 5b6b2037-efbd-46b5-b1d2-7299c828fa86

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Date deposited: 22 Mar 2013 15:33
Last modified: 13 Dec 2018 12:32

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