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

descriptionPublicationkeyboard_double_arrow_right Article , Preprint , Research , Other literature type , Report 01 Jan 2019 Germany Publisher:Center for Open ScienceJournal:SSRN Electronic Journal (eissn: 1556-5068, Copyright policy )
Authors: Xiao, Tim;

doi: 10.31226/osf.io/ds7zj , 10.31221/osf.io/ep9dn , 10.2139/ssrn.3438704 , 10.6084/m9.figshare.12497423.v1 , 10.5281/zenodo.3873245 , 10.17613/5pqw2-tem68 , 10.5281/zenodo.3873246 , 10.6084/m9.figshare.12497423 , 10.17613/h2h4-eg12

handle: 10419/204279

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

Abstract

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.

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Germany
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Keywords

G28, bepress|Social and Behavioral Sciences|Economics, G24, Economics, Arabixiv|Social and Behavioral Sciences, collateralization, Futures Pricing, Trading Volume, G17 - Financial Forecasting and Simulation, credit value adjustment (CVA), credit risk modeling, financial derivative valuation, collateralization, margin and netting., G13 - Contingent Pricing, financial derivative valuation, G32, G33, G12, G12 - Asset Pricing, G18, Bond Interest Rates, ddc:330, SocArXiv|Social and Behavioral Sciences|Economics, C58 - Financial Econometrics, bepress|Social and Behavioral Sciences|Economics|Finance, credit risk modeling, SocArXiv|Social and Behavioral Sciences|Economics|Finance, Arabixiv|Social and Behavioral Sciences|Economics|Finance, bepress|Social and Behavioral Sciences, E44, G21, SocArXiv|Social and Behavioral Sciences, Arabixiv|Social and Behavioral Sciences|Economics, credit value adjustment (CVA), margin and netting

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selected citations
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This is an alternative to the "Influence" indicator, which also reflects the overall/total impact of an article in the research community at large, based on the underlying citation network (diachronically).
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popularity
This indicator reflects the "current" impact/attention (the "hype") of an article in the research community at large, based on the underlying citation network.
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influence
This indicator reflects the overall/total impact of an article in the research community at large, based on the underlying citation network (diachronically).
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impulse
This indicator reflects the initial momentum of an article directly after its publication, based on the underlying citation network.
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