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
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: Suggested Citation