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Credit Risk and Bank Margins in Structured Financial Products: Evidence from the German Secondary Market for Discount Certificates

Journal of Futures Markets, Vol. 28, No. 4, pp. 376-397, 2008

Posted: 18 Mar 2008 Last revised: 12 May 2008

Rainer Baule

University of Hagen

Oliver Entrop

University of Passau

Marco Wilkens

University of Augsburg

Abstract

This paper analyzes bank margins in the German secondary market for exchange-traded structured financial products, with particular emphasis on the influence of banks' credit risk. A structural model allowing for the incorporation of correlation effects between market and credit risk is applied to compare quoted and fair theoretical prices. For discount certificates, as the most popular type of structured financial products in Germany, an empirical study is conducted. Compared to earlier studies, total margins are found to be rather low, whereas the portion which draws back to credit risk appears to be a material part of the total margin.

Keywords: Structured product, discount certificate, vulnerable option, credit risk margin

JEL Classification: G13, G21

Suggested Citation

Baule, Rainer and Entrop, Oliver and Wilkens, Marco, Credit Risk and Bank Margins in Structured Financial Products: Evidence from the German Secondary Market for Discount Certificates. Journal of Futures Markets, Vol. 28, No. 4, pp. 376-397, 2008. Available at SSRN: https://ssrn.com/abstract=1106746

Rainer Baule

University of Hagen ( email )

Universitaetsstrasse 41
Hagen, 58097
Germany

Oliver Entrop (Contact Author)

University of Passau ( email )

Innstrasse 27
Passau, 94032
Germany
+49 851 509 2460 (Phone)
+49 851 509 2462 (Fax)

Marco Wilkens

University of Augsburg ( email )

Universitaetsstr. 16
Augsburg, 86159
Germany
+49 821 598 4124 (Phone)
+49 821 598 4223 (Fax)

HOME PAGE: http://www.wiwi.uni-augsburg.de/bwl/wilkens/team/wilkens_marco/

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