Morini, Massimo and Prampolini, Andrea (2010): Risky funding: a unified framework for counterparty and liquidity risk.
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Abstract
We analyze the liquidity component in a derivative transaction where both counterparties can default, and the effect of a counterparty's default probability on his funding costs and benefits. The analysis shows that the value of a transaction is influenced not by the total cost of funding of a counterparty, but only by that component of the cost of funding corresponding to his bond-CDS basis spread, and this regulates which trades are possible in the market. Moreover, we find that the DVA can be represented as a funding benefit for the borrower, alternatively to the market standard that considers it a benefit coming from the borrower's own default risk.
Item Type: | MPRA Paper |
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Original Title: | Risky funding: a unified framework for counterparty and liquidity risk |
Language: | English |
Keywords: | counterparty risk; CVA; DVA; funding; liquidity; bond-CDS basis |
Subjects: | G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing ; Futures Pricing |
Item ID: | 23555 |
Depositing User: | Andrea Prampolini |
Date Deposited: | 29 Jun 2010 02:02 |
Last Modified: | 27 Sep 2019 00:38 |
References: | Algorithmics White Paper (2009). Credit Value Adjustment and the changing environment for pricing and managing counterparty risk. Available at http://www.algorithmics.com/EN/media/pdfs/Algo-WP1209- CVASurvey.pdf Brigo D. and Capponi A. (2009). Bilateral Counterparty Risk Valuation with Stochastic Dynamical Models and Application to Credit Default Swaps. Available at SSRN: http://ssrn.com/abstract=1318024 Gregory J. (2009). Being Two-Faced Over Counterparty Credit Risk? Risk February Morini M. (2009). Solving the puzzle in the interest rate market (Part 1 & 2). Available at SSRN: http://ssrn.com/abstract=1506046 Piterbarg V. (2010). Funding beyond discounting: collateral agreements and derivatives pricing. Risk February |
URI: | https://mpra.ub.uni-muenchen.de/id/eprint/23555 |
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