Counterparty Risk Valuation for Energy-Commodities Swaps: Impact of Volatilities and Correlation
21 Pages Posted: 24 Jun 2008
Date Written: June 24, 2008
Abstract
It is commonly accepted that Commodities futures and forward prices, in principle, agree under some simplifying assumptions. One of the most relevant assumptions is the absence of counterparty risk. Indeed, due to margining, futures have practically no counterparty risk. Forwards, instead, may bear the full risk of default for the counterparty when traded with brokers or outside clearing houses, or when embedded in other contracts such as swaps. In this paper we focus on energy commodities and on Oil in particular. We use a hybrid commodities-credit model to assess impact of counterparty risk in pricing formulas, both in the gross effect of default probabilities and on the subtler effects of credit spread volatility, commodities volatility and credit-commodities correlation. We illustrate our general approach with a case study based on an oil swap, showing that an accurate valuation of counterparty risk depends on volatilities and correlation and cannot be accounted for precisely through a pre-defined multiplier.
Keywords: Counterparty Risk, Credit Valuation adjustment, Commodities, Swaps, Oil models, Convenience Yield models, Stochastic Intensity models
JEL Classification: C15, C63, C65, G12, G13
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Counterparty Risk for Credit Default Swaps: Impact of Spread Volatility and Default Correlation
By Damiano Brigo and Kyriakos Chourdakis
-
By Damiano Brigo and Agostino Capponi
-
An Exact Formula for Default Swaptions’ Pricing in the SSRJD Stochastic Intensity Model
By Damiano Brigo and Naoufel El-bachir
-
Credit Default Swap Valuation with Counterparty Risk
By Yue Kuen Kwok and Seng Yuen Leung
-
By Damiano Brigo, Andrea Pallavicini, ...
-
Credit Value Adjustment for Credit Default Swaps via the Structural Default Model
By Alex Lipton and Artur Sepp
-
By Damiano Brigo, Agostino Capponi, ...
-
Dangers of Bilateral Counterparty Risk: The Fundamental Impact of Closeout Conventions
By Damiano Brigo and Massimo Morini
-
Charting a Course through the CDS Big Bang
By Johan G. B. Beumee, Damiano Brigo, ...
-
Completing CVA and Liquidity: Firm-Level Positions and Collateralized Trades
By Chris Kenyon