Pricing Financial Derivatives Subject to Multilateral Credit Risk and Collateralization

Tim Xiao

MPRA Paper from University Library of Munich, Germany

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.

Keywords: asset pricing; credit risk modeling; collateralization; comvariance; comrelation; correlation, CDS. (search for similar items in EconPapers)
JEL-codes: G12 G13 M21 P45 (search for similar items in EconPapers)
Date: 2019-03-09
New Economics Papers: this item is included in nep-rmg
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https://mpra.ub.uni-muenchen.de/94441/1/MPRA_paper_94441.pdf original version (application/pdf)

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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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:94441

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