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Optimální způsob sjednání derivátu za přítomnosti rizika protistrany
[Optimal Method of Entering a Derivative Contract in the Presence of Counterparty Risk]

Author

Listed:
  • Jan Šedivý

Abstract

The paper deals with the optimal strategy for entering a derivative contract under existence of counterparty credit risk. Derivative contracts can be traded in three ways - bilaterally without any collateral agreement, bilaterally with collateral agreement or through a central counterparty. Our goal is to define rules for determining the most efficient way of trading. We take into account credit value adjustment, funding costs and capital costs related to regulatory requirements. In our empirical research, we focus on interest rate swaps with different maturities, specifically we analyse the impact of own and counterparty credit spreads on the overall costs. The results show higher efficiency of central clearing for investors with high creditworthiness. The costs of central clearing are very sensitive with respect to own credit spread and, therefore, the final decision depends on the actual relation with counterparty spread.

Suggested Citation

  • Jan Šedivý, 2019. "Optimální způsob sjednání derivátu za přítomnosti rizika protistrany [Optimal Method of Entering a Derivative Contract in the Presence of Counterparty Risk]," Politická ekonomie, Prague University of Economics and Business, vol. 2019(1), pages 65-81.
    • Handle: RePEc:prg:jnlpol:v:2019:y:2019:i:1:id:1217:p:65-81
    DOI: 10.18267/j.polek.1217
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    References listed on IDEAS

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    1. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
    2. Igor Paholok, 2015. "Credit Value Adjustment and Economic Motivation to Trade on PXE," Prague Economic Papers, Prague University of Economics and Business, vol. 2015(3), pages 245-259.
    3. Marco Bianchetti, 2009. "Two Curves, One Price: Pricing & Hedging Interest Rate Derivatives Decoupling Forwarding and Discounting Yield Curves," Papers 0905.2770, arXiv.org, revised Jul 2012.
    4. Andrew Green & Chris Kenyon, 2014. "KVA: Capital Valuation Adjustment," Papers 1405.0515, arXiv.org, revised Oct 2014.
    5. Vasicek, Oldrich Alfonso, 1977. "Abstract: An Equilibrium Characterization of the Term Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(4), pages 627-627, November.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    counterparty credit risk; credit valuation adjustment; funding valuation adjustment; regulatory requirements;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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