Pricing Financial Derivatives Subject to Multilateral Credit Risk and Collateralization

Tim Xiao

Working Papers from HAL

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. Acknowledge: The work was sponsored by FinPricing at www.finpricing.com

Keywords: correlation; CDS; asset pricing; credit risk modeling; collateralization; comvariance; comrelation (search for similar items in EconPapers)
Date: 2019-02-18
New Economics Papers: this item is included in nep-ban and nep-rmg
Note: View the original document on HAL open archive server: https://hal.science/hal-02024147v1
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Related works:
Working Paper: Pricing Financial Derivatives Subject to Multilateral Credit Risk and Collateralization (2019)
Working Paper: Pricing Financial Derivatives Subject to Multilateral Credit Risk and Collateralization (2019)
Working Paper: Pricing Financial Derivatives Subject to Multilateral Credit Risk and Collateralization (2019)
Working Paper: Pricing Financial Derivatives Subject to Multilateral Credit Risk and Collateralization (2019)
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