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The pitfalls of central clearing in the presence of systematic risk

Kubitza, Christian; Pelizzon, Loriana; Getmansky, Mila - 2018

Through the lens of market participants' objective to minimize counterparty risk, we provide an explanation for the reluctance to clear derivative trades in the absence of a central clearing obligation. We develop a comprehensive understanding of the benefits and potential pitfalls with respect...

Persistent link: https://www.econbiz.de/10011923506

Hedging Volatility Risk of Exotic Structures Using Variance Derivatives

Zarov, Iliyan Radev - 2012

We investigate the effect of including variance derivatives as calibration and hedging instruments for pricing and hedging exotic structures. This is studied empirically using market data for SPX and VIX derivatives applied in a stochastic volatility jump diffusion model

Persistent link: https://www.econbiz.de/10013113731

Estimating Oil Risk Factors Using Information from Equity and Derivatives Markets

Chiang, I-Hsuan Ethan - 2013

We introduce a novel approach to estimating latent oil risk factors and establish their significance in pricing non-oil securities. Our model, which features four factors with simple economic interpretations, is estimated using both derivative prices and oil-related equity returns. The fit is...

Persistent link: https://www.econbiz.de/10013091009

The VIX Premium

Cheng, Ing-Haw - 2018

Ex-ante estimates of the volatility premium embedded in VIX futures, known as the VIX premium, fall or stay flat when …-post returns to VIX futures with a coefficient near one, and 2) Falling ex-ante premiums predict increasing ex-post market and … investment risk, creating profitable trading opportunities. Falling hedging demand helps explain this behavior, as premiums and …

Persistent link: https://www.econbiz.de/10012937777

Basis Risk When Hedging a Global Credit Portfolio

Chamizo, Alvaro - 2017

The calculation of the capital charge for CVA risk, as required by the Basel Committee on Banking Supervision, is usually rather unstable due to the volatility of CDS spreads. Since credit derivatives on single names are not very liquid, the implied adjustments in capital charges could be...

Persistent link: https://www.econbiz.de/10012944310

Option Pricing in an Investment Risk-Return Setting

Kim, Young Shin - 2019

In this paper, we combine modern portfolio theory and option pricing theory so that a trader who takes a position in a European option contract and the underlying assets can construct an optimal portfolio such that at the moment of the contract's maturity the contract is perfectly hedged. We...

Persistent link: https://www.econbiz.de/10012865720

Synthetic CDO Pricing : The Perspective of Risk Integration

Hu, Conghui - 2015

The underlying asset pool of collateral debt obligations (CDOs) simultaneously encompasses credit risk and market risk. However, the standard CDO pricing model not only underestimates the risk to the asset pool due to a poor description of the correlation structure among obligors but is also...

Persistent link: https://www.econbiz.de/10013013661

Risk Premia in Option Markets

Madan, Dilip B. - 2015

Risk premia are related to price probability ratios or for continuous time pure jump processes the ratios of jump arrival rates under the pricing and physical measures. The variance gamma model is employed to synthesize densities with risk premia seen as the ratio of the three parameters. The...

Persistent link: https://www.econbiz.de/10013018782

Volatility Derivatives and Downside Risk

Lin, Yueh-Neng - 2016

The challenge in long volatility strategies is to minimize the cost of carrying such insurance due to negative roll yields and negative volatility risk premia. This study proposes a hedging strategy for volatility as an asset class that provides substantial protection against market crashes,...

Persistent link: https://www.econbiz.de/10012984895

Option-Based Pricing of Wrong Way Risk for CVA

Kenyon, Chris - 2016

The two main issues for managing wrong way risk (WWR) for the credit valuation adjustment (CVA, i.e. WW-CVA) are calibration and hedging. Hence we start from a novel model-free worst-case approach based on static hedging of counterparty exposure with liquid options. We say "start from" because...

Persistent link: https://www.econbiz.de/10012986205

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