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Price impacts of imperfect collateralization

Author

Listed:
  • Kenichiro Shiraya

    (Graduate School of Economics, University of Tokyo, 7-3-1, Hongo, Bunkyou-ku, Tokyo 113-0033, Japan)

  • Akihiko Takahashi

    (Graduate School of Economics, University of Tokyo, 7-3-1, Hongo, Bunkyou-ku, Tokyo 113-0033, Japan)

Abstract

This paper studies impacts of imperfect collateralization on derivatives values. Particularly, we investigate option prices in no collateral posting and time-lagged collateral posting cases with stochastic volatility, interest rate, and default intensity models, where a stochastic collateral asset value may depend on the values of the assets different from the underlying contract. We also derive an approximation of the credit value adjustment (CVA)’s density function in pricing forward contract with bilateral counter party risk, which seems useful in evaluation of the CVA’s Value-at-Risk (VaR).

Suggested Citation

  • Kenichiro Shiraya & Akihiko Takahashi, 2016. "Price impacts of imperfect collateralization," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 3(01), pages 1-31, March.
    • Handle: RePEc:wsi:ijfexx:v:03:y:2016:i:01:n:s2424786316500043
    DOI: 10.1142/S2424786316500043
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    References listed on IDEAS

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    1. Damiano Brigo & Andrea Pallavicini & Vasileios Papatheodorou, 2011. "Arbitrage-Free Valuation Of Bilateral Counterparty Risk For Interest-Rate Products: Impact Of Volatilities And Correlations," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 14(06), pages 773-802.
    2. N. El Karoui & S. Peng & M. C. Quenez, 1997. "Backward Stochastic Differential Equations in Finance," Mathematical Finance, Wiley Blackwell, vol. 7(1), pages 1-71, January.
    3. Akihiko Takahashi & Toshihiro Yamada, 2013. "On an Asymptotic Expansion of Forward-Backward SDEs with a Perturbed Driver," CARF F-Series CARF-F-326, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo, revised Oct 2013.
    4. Akihiko Takahashi & Toshihiro Yamada, 2013. "On an Asymptotic Expansion of Forward-Backward SDEs with a Perturbed Driver," CIRJE F-Series CIRJE-F-902, CIRJE, Faculty of Economics, University of Tokyo.
    5. Hu, Ying & Yong, Jiongmin, 2000. "Forward-backward stochastic differential equations with nonsmooth coefficients," Stochastic Processes and their Applications, Elsevier, vol. 87(1), pages 93-106, May.
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