Static Models of Central Counterparty Risk

Abstract In order to share risk, protection buyers trade derivatives with protection sellers. Protection sellers’ actions affect the riskiness of their assets, which can create counterparty risk. Because these actions are unobservable, moral hazard limits risk sharing. To mitigate this problem, privately optimal derivative contracts involve variation margins. When margins are called, protection sellers must liquidate some assets, depressing asset prices. This tightens the incentive constraints of other protection sellers and reduces their ability to provide insurance. Despite this fire-sale externality, equilibrium is information-constrained efficient. Investors, who benefit from buying assets at fire-sale prices, optimally supply insurance against the risk of fire sales.

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Computerized construction of static models for process control in beneficiation plants

Soviet Mining Science ◽

10.1007/bf02497577 ◽

1967 ◽

Vol 3 (4) ◽

pp. 450-452

Author(s):

V. I. Braun ◽

V. A. Kozlov ◽

T. I. Lavrova ◽

V. S. Protsuto

Keyword(s):

Process Control ◽

Static Models

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PRICING COUNTERPARTY RISK INCLUDING COLLATERALIZATION, NETTING RULES, RE-HYPOTHECATION AND WRONG-WAY RISK

International Journal of Theoretical and Applied Finance ◽

10.1142/s0219024913500076 ◽

2013 ◽

Vol 16 (02) ◽

pp. 1350007 ◽

Cited By ~ 12

Author(s):

DAMIANO BRIGO ◽

AGOSTINO CAPPONI ◽

ANDREA PALLAVICINI ◽

VASILEIOS PAPATHEODOROU

Keyword(s):

Interest Rate ◽

Credit Derivatives ◽

Credit Default Swaps ◽

Credit Spread ◽

Counterparty Risk ◽

Default Correlation ◽

Dynamical Models ◽

Credit Default ◽

The Impact

This article is concerned with the arbitrage-free valuation of bilateral counterparty risk through stochastic dynamical models when collateral is included, with possible rehypothecation. The payout of claims is modified to account for collateral margining in agreement with International Swap and Derivatives Association (ISDA) documentation. The analysis is specialized to interest-rate and credit derivatives. In particular, credit default swaps are considered to show that a perfect collateralization cannot be achieved under default correlation. Interest rate and credit spread volatilities are fully accounted for, as is the impact of re-hypothecation, collateral margining frequency, and dependencies.

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