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RESTRUCTURING COUNTERPARTY CREDIT RISK CLAUDIO ALBANESE, DAMIANO BRIGO, AND FRANK OERTEL
 

Summary: RESTRUCTURING COUNTERPARTY CREDIT RISK
CLAUDIO ALBANESE, DAMIANO BRIGO, AND FRANK OERTEL
Abstract. We introduce an innovative theoretical framework for the valuation and replication
of derivative transactions between defaultable entities based on the principle of arbitrage free-
dom. Our framework extends the traditional formulations based on Credit and Debit Valuation
Adjustments (CVA and DVA).
Depending on how the default contingency is accounted for, we list a total of ten differ-
ent structuring styles. These include bi-partite structures between a bank and a counterparty,
tri-partite structures with one margin lender in addition, quadri-partite structures with two mar-
gin lenders and, most importantly, configurations where all derivative transactions are cleared
through a Central Counterparty Clearing House (CCP).
We compare the various structuring styles under a number of criteria including consistency
from an accounting standpoint, counterparty risk hedgeability, numerical complexity, transaction
portability upon default, induced behaviour and macro-economic impact of the implied wealth
allocation.
Contents
1. Introduction 2
1.1. From unilateral UCVA and CCDS to bilateral BCVA 2
1.2. First-to-default FTDCVA and FTDDVA 3
1.3. Basel III 4

  

Source: Albanese, Claudio - Department of Mathematics, King's College London

 

Collections: Mathematics