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Integrated Structural Approach to Credit Value Adjustment

Ballotta, L. ORCID: 0000-0002-2059-6281, Fusai, G. ORCID: 0000-0001-9215-2586 and Marazzina, D. (2018). Integrated Structural Approach to Credit Value Adjustment. European Journal of Operational Research, doi: 10.1016/j.ejor.2018.07.026

Abstract

This paper proposes an integrated pricing framework for Credit Value Adjustment of equity and commodity products. The given framework, in fact, generates dependence endogenously, allows for calibration and pricing to be based on the same numerical schemes (up to Monte Carlo simulation), and also allows the inclusion of risk mitigation clauses such as netting, collateral and initial margin provisions. The model is based on a structural approach which uses correlated Levy processes with idiosyncratic and systematic components; the pricing numerical scheme, instead, efficiently combines Monte Carlo simulation and Fourier transform based methods. We illustrate the tractability of the proposed framework and the performance of the proposed numerical scheme by means of a case study on a portfolio of commodity swaps using real market data.

Publication Type: Article
Additional Information: © 2018 Elsevier. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/
Publisher Keywords: Finance; Credit Value Adjustment; Collateral; Initial Margin; Netting
Subjects: H Social Sciences > HG Finance
Departments: Cass Business School > Finance
URI: http://openaccess.city.ac.uk/id/eprint/20104
[img] Text - Accepted Version
This document is not freely accessible until 23 July 2020 due to copyright restrictions.
Available under License Creative Commons Attribution Non-commercial No Derivatives.

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