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

Arbeitspapier

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.

Angaben zum Objekt

• Sprache: Englisch

Klassifikation und Themen

• Klassifikation: Wirtschaft ; Financial Markets and the Macroeconomy ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Asset Pricing; Trading Volume; Bond Interest Rates ; Investment Banking; Venture Capital; Brokerage; Ratings and Ratings Agencies ; Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill ; Bankruptcy; Liquidation ; General Financial Markets: Government Policy and Regulation ; Financial Institutions and Services: Government Policy and Regulation
• Thema: credit value adjustment (CVA) ; credit risk modeling ; financial derivative valuation ; collateralization ; margin and netting

Beteiligte, Orts- und Zeitangaben

• Ereignis: Geistige Schöpfung
• (wer): Xiao, Tim
• Ereignis: Veröffentlichung
• (wer): ZBW – Leibniz Information Centre for Economics
• (wo): Kiel, Hamburg
• (wann): 2019

Weitere Informationen

• Handle: http://hdl.handle.net/10419/204279
• Letzte Aktualisierung: 10.03.2025, 11:44 MEZ