• Pricing Financial Derivatives Subject to Multilateral Credit Risk and Collateralization

    Author(s):
    Tim Xiao (see profile)
    Date:
    2020
    Group(s):
    Business Management
    Subject(s):
    Economics
    Item Type:
    Article
    Tag(s):
    asset pricing, credit risk modeling, colateral, risk management, CDS
    Permanent URL:
    http://dx.doi.org/10.17613/2yk6-m420
    Abstract:
    This article presents a new model for valuing financial contracts subject to credit risk and collateralization. Examples include the valuation of a credit default swap (CDS) contract that is affected by the trilateral credit risk of the buyer, seller and reference entity. We show that default dependency has a significant impact on asset pricing. In fact, correlated default risk is one of the most pervasive threats in financial markets. We also show that a fully collateralized CDS is not equivalent to a risk-free one. In other words, full collateralization cannot eliminate counterparty risk completely in the CDS market.
    Metadata:
    xml
    Status:
    Published
    Last Updated:
    3 years ago
    License:
    All-Rights-Granted
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