Abstract

http://ssrn.com/abstract=2215259
 
 

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Pricing and Mitigation of Counterparty Credit Exposures


Agostino Capponi


Johns Hopkins University - Department of Applied Mathematics and Statistics

January 31, 2013

Handbook of Systemic Risk, edited by J.-P. Fouque and J.Langsam. Cambridge University Press, 2012

Abstract:     
We analyze the market price of counterparty risk and develop an arbitrage-free pricing valuation framework, inclusive of collateral mitigation. We show that the adjustment is given by the sum of option payoff terms, depending on the netted exposure, i.e. the difference between the on-default exposure and the pre-default collateral account. We specialize our analysis to Interest Rates Swaps (IRS) and Credit Default Swaps (CDS) as underlying portfolio, and perform a numerical study to illustrate the impact of default correlation, collateral margining frequency, and collateral re-hypothecation on the resulting adjustment. We also discuss problems of current research interest in the counterparty risk community.

Number of Pages in PDF File: 21

Keywords: counterparty risk, systemic risk, default contagion, credit valuation adjustment

JEL Classification: C15, C63, C65, G12, G13

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Date posted: February 12, 2013  

Suggested Citation

Capponi, Agostino, Pricing and Mitigation of Counterparty Credit Exposures (January 31, 2013). Handbook of Systemic Risk, edited by J.-P. Fouque and J.Langsam. Cambridge University Press, 2012. Available at SSRN: http://ssrn.com/abstract=2215259

Contact Information

Agostino Capponi (Contact Author)
Johns Hopkins University - Department of Applied Mathematics and Statistics ( email )
3400 N Charles Street
Whitehead 100
Baltimore, MD 21218
United States
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