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Study on optimal timing of mark-to-market for contingent credit risk control

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  • Jiali Liao
  • Ted Theodosopoulos

Abstract

Over-the-counter derivatives have contributed significantly to the effectiveness and efficiency of the international financial system but also entail significant counterparty credit risk. Collateralization is one of the most important and widespread credit risk mitigation techniques used in derivatives transactions. However, the relevant decisions are often made in an ad-hoc manner, without reference to an analytical framework. Very little academic research has addressed the quantitative analysis of collateralization for contingent credit risk control. The issue of mark-to-market timing becomes important for reducing credit exposure of illiquid and long term derivative contracts due to the difficulty and cost of marking to market. the goal of this research is to propose a framework for minimizing the potential credit exposure of collateralized derivative transactions by optimizing mark-to-market timing.

Suggested Citation

  • Jiali Liao & Ted Theodosopoulos, 2005. "Study on optimal timing of mark-to-market for contingent credit risk control," Papers math/0506077, arXiv.org.
    • Handle: RePEc:arx:papers:math/0506077
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    References listed on IDEAS

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    1. repec:zbw:bofrdp:2000_002 is not listed on IDEAS
    2. Jokivuolle, Esa & Peura, Samu, 2000. "A model for estimating recovery rates and collateral haircuts for bank loans," Research Discussion Papers 2/2000, Bank of Finland.
    3. Cossin, Didier & González, Fernando & Huang, Zhijiang & Backé, Peter, 2003. "A framework for collateral risk control determination," Working Paper Series 209, European Central Bank.
    4. Esa Jokivuolle & Samu Peura, 2003. "Incorporating Collateral Value Uncertainty in Loss Given Default Estimates and Loan‐to‐value Ratios," European Financial Management, European Financial Management Association, vol. 9(3), pages 299-314, September.
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