We present a novel empirical benchmark for analyzing credit risk using “pseudo firms” that purchase traded assets financed with equity and zero-coupon bonds. By no-arbitrage, pseudo bonds are equivalent to Treasuries minus put options on pseudo-firm assets. Empirically, like corporate...

We propose a method to extract the risk-neutral distribution of firm-specific stock returns using both options and credit default swaps (CDS). Options and CDS provide information about the central part and the left tail of the distribution, respectively. Together but not in isolation, options...

In this research note, we price Bermudan structured derivatives including the consequences of default, collateral margining, funding and investment costs. We use LSA Monte Carlo method for finding MTM for collateral margining along all simulation points. We also find 'default MTM' using LSA...

Recently, the advantages of conformal deformations of the contours of integration in pricing formulas were demonstrated in the context of wide classes of Levy models and the Heston model. In the present paper we construct efficient conformal deformations of the contours of integration in the...

Credit Support Annexes (CSAs) that allow multiple currencies as collateral give rise to a collateral choice option in discounting. Numerical efficiency for valuing this optionality is key and first-order approximations have been proposed previously. In this paper, for the case of two currencies,...

This paper studies a valuation framework for financial contracts subject to reference and counterparty default risks with collateralization requirement. We propose a fixed point approach to analyze the mark-to-market contract value with counterparty risk provision, and show that it is a unique...

This paper analyzes the effect of counterparty credit risk on optimal early exercise policy and value of American options. In contrast with the existing literature we find that the price of the underlying asset at which it is optimal to exercise an American option can be significantly different...

A framework for measuring and managing the risk of embedded options in non-traded credit is developed. For typical bank clients there is no market information related to their ability to pay (bond or CDS spreads) available. In this case a bank has to rely solely on statistical data to judge the...

This paper studies the effects of default risk on equity option returns. We show that there is a cross-sectional and a time-series relation between default risk and option returns. In the cross-section, expected delta-hedged equity option returns have a negative relation with default risk...

In recent years, a liquid market for options on a broad credit default swap index (CDX) has developed. We study the extent to which these options are priced consistently with options on a broad equity index (SPX). We consider a rich structural credit risk model in which firm assets follow a...