Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/73656
Authors: 
Albanese, Claudio
Brigo, Damiano
Oertel, Frank
Year of Publication: 
2013
Series/Report no.: 
Discussion Paper, Deutsche Bundesbank 14/2013
Abstract: 
We introduce an innovative theoretical framework for the valuation and replication of derivative transactions between defaultable entities based on the principle of arbitrage freedom. 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 different structuring styles. These include bi-partite structures between a bank and a counterparty, tri-partite structures with one margin lender in addition, quadripartite structures with two margin lenders and, most importantly, configurations where all derivative transactions are cleared through a central counterparty (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.
Subjects: 
counterparty credit risk
CVA
DVA
margin lending
securitisation
Basel III
CCP
clearing
collateral
OTC
JEL: 
C51
C54
C63
E51
G01
G32
G33
ISBN: 
978-3-86558-910-1
Document Type: 
Working Paper

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