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An equilibrium model for the OTC derivatives market with a collateral agreement

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  • Takino, Kazuhiro

Abstract

In this study, we consider an over-the-counter (OTC) derivatives market model with counterparty risk and collateral agreement. We verify the effects of collateral agreement on derivative transactions using an equilibrium analysis. Options and forward markets are considered in this study. Options and forward markets correspond to the unilateral and bilateral counterparty risk cases, respectively. We derive the demand and supply functions for both derivative contracts using agent utility maximizations. These lead to the equilibrium prices and volumes for the contracts and enable us to observe the influence of a collateral agreement. We consider a general commodity derivatives market in the numerical implementation. Our numerical results verify how the market equilibriums for derivatives change when the collateral amount changes through shifts in demand and supply.

Suggested Citation

  • Takino, Kazuhiro, 2016. "An equilibrium model for the OTC derivatives market with a collateral agreement," Journal of Commodity Markets, Elsevier, vol. 4(1), pages 41-55.
    • Handle: RePEc:eee:jocoma:v:4:y:2016:i:1:p:41-55
    DOI: 10.1016/j.jcomm.2016.11.001
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    References listed on IDEAS

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    Cited by:

    1. Takino, Kazuhiro & Ishinagi, Yoshikazu, 2023. "Are banks risk-averse or risk-neutral investors?," Journal of Behavioral and Experimental Finance, Elsevier, vol. 37(C).
    2. Kazuhiro Takino, 2022. "The impact of non-cash collateralization on the over-the-counter derivatives markets," Review of Derivatives Research, Springer, vol. 25(2), pages 137-171, July.

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    More about this item

    Keywords

    OTC derivative market; Counterparty risk (right-way risk; wrong-way risk); Collateral; Incomplete market; Utility-based pricing; Market equilibrium;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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