Restructuring counterparty credit risk

DOI10.1142/S0219024913500106MaRDI QIDQ5299996zbMATH OpenOpenAlexFDO

Authors Claudio Albanese, Damiano Brigo, Frank Oertel

Publication date 24 June 2013

Published in International Journal of Theoretical and Applied Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1112.1607

zbMATH Keywords

collateralcounterparty riskcounterparty risk restructuringcredit riskcredit valuation adjustmentCVA restructuringDVAmargin lending

Mathematics Subject Classification ID

Credit risk (91G40)

Abstract: We introduce an innovative theoretical framework to model 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 bipartite 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 (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.

Recommendations

• Bilateral counterparty risk under funding constraints. II: CVA
• Bilateral counterparty risk under funding constraints. I: Pricing
• Counterparty risk and funding. A tale of two puzzles. With an introductory dialogue by Damiano Brigo
• Pricing counterparty risk including collateralization, netting rules, re-hypothecation and wrong-way risk
• CVA under alternative settlement conventions and with systemic risk

Cites work

• Arbitrage-free valuation of bilateral counterparty risk for interest-rate products: impact of volatilities and correlations
• Counterparty risk for credit default swaps: impact of spread volatility and default correlation
• Credit risk: Modelling, valuation and hedging

Cited in

(7)

• Design of master agreements for OTC derivatives
• Calculation of credit valuation adjustment based on least square Monte Carlo methods
• XVA metrics for CCP optimization
• Credit, funding, margin, and capital valuation adjustments for bilateral portfolios
• From credit valuation adjustments to credit capital commitments
• A risk-sharing framework of bilateral contracts
• Wealth transfers, indifference pricing, and XVA compression schemes

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