BILATERAL COUNTERPARTY RISK UNDER FUNDING CONSTRAINTS-PART II: CVA
The correction in value of an over‐the‐counter derivative contract due to counterparty risk under funding constraints is represented as the value of a dividend‐paying option on the value of the contract clean of counterparty risk and excess funding costs. This representation allows one to analyze th...
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| Veröffentlicht in: | Mathematical finance 2015-01, Vol.25 (1), p.23-50 |
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| container_title | Mathematical finance |
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| creator | Crepey, Stéphane |
| description | The correction in value of an over‐the‐counter derivative contract due to counterparty risk under funding constraints is represented as the value of a dividend‐paying option on the value of the contract clean of counterparty risk and excess funding costs. This representation allows one to analyze the structure of this correction, the so‐called Credit Valuation Adjustment (CVA for short), in terms of replacement cost/benefits, credit cost/benefits, and funding cost/benefits. We develop a reduced‐form backward stochastic differential equations (BSDE) approach to the problem of pricing and hedging the CVA. In the Markov setup, explicit CVA pricing and hedging schemes are formulated in terms of semilinear partial differential equations. |
| doi_str_mv | 10.1111/mafi.12005 |
| format | Article |
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In the Markov setup, explicit CVA pricing and hedging schemes are formulated in terms of semilinear partial differential equations.</description><subject>Adjustment costs</subject><subject>backward stochastic differential equation</subject><subject>counterparty risk</subject><subject>credit valuation adjustment</subject><subject>Derivatives</subject><subject>Finance</subject><subject>Funding</subject><subject>funding costs</subject><subject>Hedging</subject><subject>Mathematics</subject><subject>Over the counter trading</subject><subject>Partial differential equations</subject><subject>Price differentiation</subject><subject>Pricing</subject><subject>Risk</subject><subject>Stochastic processes</subject><subject>Studies</subject><subject>Valuation</subject><issn>0960-1627</issn><issn>1467-9965</issn><fulltext>true</fulltext><rsrctype>article</rsrctype><creationdate>2015</creationdate><recordtype>article</recordtype><recordid>eNp9kE9PwkAQxTdGExG9-AmaeDEmxf2_rbeKgI21mFJEvWyWZjcpAsUuRPn2LlY9eHAuM8n83uTNA-AUwQ5ydblQpuwgDCHbAy1EufDDkLN90IIhhz7iWByCI2tnEEJKqWiB6-s4ifJeFiVedzhO3fQQZfmzl8WjO2-c3vQyr-9anA7cPh3lWRSn-cjfQV4cX3ndx-gYHBg1t_rku7fBuN_Lu7d-MhzE3SjxC0YC5iuusWZmqo0OteHEqMAY5WxRPg2R0kxQgjEXhECMFCZGF5hiigQmimFESBucN3dXdfW20XYtF6Ut9HyulrraWIk4w4QLFlCHnv1BZ9WmXjp3jqIsIFBQ5KiLhirqytpaG7mqy4WqtxJBuYtT7uKUX3E6GDXweznX239IeR_14x-N32hKu9YfvxpVv0r3p2Bykg5kGGQvfTZB8ol8An_mfmw</recordid><startdate>201501</startdate><enddate>201501</enddate><creator>Crepey, Stéphane</creator><general>Blackwell Publishing Ltd</general><scope>BSCLL</scope><scope>AAYXX</scope><scope>CITATION</scope><scope>8BJ</scope><scope>FQK</scope><scope>JBE</scope><scope>JQ2</scope></search><sort><creationdate>201501</creationdate><title>BILATERAL COUNTERPARTY RISK UNDER FUNDING CONSTRAINTS-PART II: CVA</title><author>Crepey, Stéphane</author></sort><facets><frbrtype>5</frbrtype><frbrgroupid>cdi_FETCH-LOGICAL-c5385-a6e2e5fbefe9ef63fa8ffa96046b91ae5743226733021a23fec24241723a52133</frbrgroupid><rsrctype>articles</rsrctype><prefilter>articles</prefilter><language>eng</language><creationdate>2015</creationdate><topic>Adjustment costs</topic><topic>backward stochastic differential equation</topic><topic>counterparty risk</topic><topic>credit valuation adjustment</topic><topic>Derivatives</topic><topic>Finance</topic><topic>Funding</topic><topic>funding costs</topic><topic>Hedging</topic><topic>Mathematics</topic><topic>Over the counter trading</topic><topic>Partial differential equations</topic><topic>Price differentiation</topic><topic>Pricing</topic><topic>Risk</topic><topic>Stochastic processes</topic><topic>Studies</topic><topic>Valuation</topic><toplevel>peer_reviewed</toplevel><toplevel>online_resources</toplevel><creatorcontrib>Crepey, Stéphane</creatorcontrib><collection>Istex</collection><collection>CrossRef</collection><collection>International Bibliography of the Social Sciences (IBSS)</collection><collection>International Bibliography of the Social Sciences</collection><collection>International Bibliography of the Social Sciences</collection><collection>ProQuest Computer Science Collection</collection><jtitle>Mathematical finance</jtitle></facets><delivery><delcategory>Remote Search Resource</delcategory><fulltext>fulltext</fulltext></delivery><addata><au>Crepey, Stéphane</au><format>journal</format><genre>article</genre><ristype>JOUR</ristype><atitle>BILATERAL COUNTERPARTY RISK UNDER FUNDING CONSTRAINTS-PART II: CVA</atitle><jtitle>Mathematical finance</jtitle><addtitle>Mathematical Finance</addtitle><date>2015-01</date><risdate>2015</risdate><volume>25</volume><issue>1</issue><spage>23</spage><epage>50</epage><pages>23-50</pages><issn>0960-1627</issn><eissn>1467-9965</eissn><abstract>The correction in value of an over‐the‐counter derivative contract due to counterparty risk under funding constraints is represented as the value of a dividend‐paying option on the value of the contract clean of counterparty risk and excess funding costs. This representation allows one to analyze the structure of this correction, the so‐called Credit Valuation Adjustment (CVA for short), in terms of replacement cost/benefits, credit cost/benefits, and funding cost/benefits. We develop a reduced‐form backward stochastic differential equations (BSDE) approach to the problem of pricing and hedging the CVA. In the Markov setup, explicit CVA pricing and hedging schemes are formulated in terms of semilinear partial differential equations.</abstract><cop>Oxford</cop><pub>Blackwell Publishing Ltd</pub><doi>10.1111/mafi.12005</doi><tpages>28</tpages><oa>free_for_read</oa></addata></record> |
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| language | eng |
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| source | Wiley Online Library Journals Frontfile Complete; Business Source Complete |
| subjects | Adjustment costs backward stochastic differential equation counterparty risk credit valuation adjustment Derivatives Finance Funding funding costs Hedging Mathematics Over the counter trading Partial differential equations Price differentiation Pricing Risk Stochastic processes Studies Valuation |
| title | BILATERAL COUNTERPARTY RISK UNDER FUNDING CONSTRAINTS-PART II: CVA |
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