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What Happens when Peter can't Pay Paul: Risk Management at Futures Exchange Clearinghouses

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  • Shi, Wei
  • Irwin, Scott H.

Abstract

We model a futures exchange's clearinghouse as a "bank" holding a portfolio of credit lines available to its clearing members and collateralized with clearing margins or, equivalently, a portfolio of short European put basket options. Consequently, the "bank" model measures the clearinghouse's risk exposure as the sum of the payoff functions of these put options, emphasizing the portfolio diversification and the option-like payoffs. The model is used to assess exchange's clearinghouse's liquidity and credit risk exposure. The model provides exchange clearinghouses and government regulators with a theoretical framework of risk management that systematically integrates clearing margin requirements,credit lines and economic capital.

Suggested Citation

  • Shi, Wei & Irwin, Scott H., 2006. "What Happens when Peter can't Pay Paul: Risk Management at Futures Exchange Clearinghouses," 2006 Annual meeting, July 23-26, Long Beach, CA 21087, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    • Handle: RePEc:ags:aaea06:21087
    DOI: 10.22004/ag.econ.21087
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    References listed on IDEAS

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    Risk and Uncertainty;

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