This paper presents a new
model for pricing OTC derivatives subject to collateralization. It allows for
collateral posting adhering to bankruptcy laws. As such, the model can back out
the market price of a collateralized contract. This framework is very useful
for valuing outstanding derivatives. Using a unique dataset, we find empirical
evidence that credit risk alone is not overly important in determining
credit-related spreads. Only accounting for both collateral arrangement and
credit risk can sufficiently explain unsecured credit costs. This finding
suggests that failure to properly account for collateralization may result in significant
mispricing of derivatives. We also empirically gauge the impact of collateral
agreements on risk measurements. Our findings indicate that there are important
interactions between market and credit risk.
Tim, X (2020). A New Model for Pricing Collateralized OTC Derivatives. Afribary.com: Retrieved March 08, 2021, from https://afribary.com/works/a-new-model-for-pricing-collateralized-otc-derivatives
Xiao, Tim. "A New Model for Pricing Collateralized OTC Derivatives" Afribary.com. Afribary.com, 20 Aug. 2020, https://afribary.com/works/a-new-model-for-pricing-collateralized-otc-derivatives . Accessed 08 Mar. 2021.
Xiao, Tim. "A New Model for Pricing Collateralized OTC Derivatives". Afribary.com, Afribary.com, 20 Aug. 2020. Web. 08 Mar. 2021. < https://afribary.com/works/a-new-model-for-pricing-collateralized-otc-derivatives >.
Xiao, Tim. "A New Model for Pricing Collateralized OTC Derivatives" Afribary.com (2020). Accessed March 08, 2021. https://afribary.com/works/a-new-model-for-pricing-collateralized-otc-derivatives