2013/11/30 by Damiano Brigo, Brigo, Damiano, Andrea Pallavicini +1
Business, Management and Accounting · Economics, Econometrics and Finance · #60G51 #60G70 #60H35 #62G32 #65C05 #65C20 #91B70 #Credit Risk and Financial Regulations #FOS: Economics and business #Financial Markets and Investment Strategies #Financial Reporting and Valuation Research #Pricing of Securities (q-fin.PR) #Private Equity and Venture Capital
paper · pdf · doi:10.48550/arxiv.1312.0128
openalex publication_date 2013/11/30 · openalex created_date 2025/10/24 · openalex updated_date 2026/07/28
We present a dialogue on Funding Costs and Counterparty Credit Risk modeling,\ninclusive of collateral, wrong way risk, gap risk and possible Central Clearing\nimplementation through CCPs. This framework is important following the fact\nthat derivatives valuation and risk analysis has moved from exotic derivatives\nmanaged on simple single asset classes to simple derivatives embedding the new\nor previously neglected types of complex and interconnected nonlinear risks we\naddress here. This dialogue is the continuation of the "Counterparty Risk,\nCollateral and Funding FAQ" by Brigo (2011). In this dialogue we focus more on\nfunding costs for the hedging strategy of a portfolio of trades, on the\nnon-linearities emerging from assuming borrowing and lending rates to be\ndifferent, on the resulting aggregation-dependent valuation process and its\noperational challenges, on the implications of the onset of central clearing,\non the macro and micro effects on valuation and risk of the onset of CCPs, on\ninitial and variation margins impact on valuation, and on multiple discount\ncurves. Through questions and answers (Q&A) between a senior expert and a\njunior colleague, and by referring to the growing body of literature on the\nsubject, we present a unified view of valuation (and risk) that takes all such\naspects into account.\n