1,720,977 research outputs found
Why did CPDOs Fail? An Analysis Focused on Credit Spread Modeling
No full textIn this paper we propose a model to evaluate the performance of a Constant Proportion Debt Obligation (CPDO) and assess its rating. We model credit spread evolution in a HJM framework and default events for CPDO are generated by using a reduced form approach. Implementing a numerical algorithm that simulates the strategy of a CPDO, we obtain a rating for a CPDO by using Monte Carlo simulations. We find a rating inferior to the one assigned by rating agencies. Using our model for credit spread dynamics, the revealed default probability for CPDO could have been predicted
Electricity Market Equilibrium Model with Seasonal Volatilities
No full textIn this paper we propose and implement an electricity market equilibrium model. The model, originally conceived by Hinz [8], is now set up by making use as input of the spot price pattern obtained with the term structure Heath Jarrow Morton [6] model, but we assume that price volatility is seasonal. The chosen volatility functional form captures the price return seasonality and consequently allows to support the production scheduling. We show as seasonality and electricity demand forecasting techniques make the study of energy forward price dynamics related to the demand and the provisional capacity of the agents
Modelling the counterparty credit risk of a swap on the spark spread
No full textWe consider the impact of counterparty risk on the pricing of financial derivatives contracts on energy commodities. We model the counterparty credit risk exposure within the Heath-Jarrow-Morton framework (Heath et al. Econ J Econ Soc. 6: 77-105, 1992), allowing the counterparty credit spread curve to evolve according to its own volatility and to the correlation between the risk-free interest rate and the credit spread. We focus on the case in which the underlying swap contract is the spark spread. We evaluate the counterparty credit valuation adjustment (CVA) of the swap fair price. In doing so, we take into consideration all relevant correlations, namely the correlation between the electricity and natural gas return processes and between these and the credit spread. Finally, we show how in our framework CVA varies with electricity and natural gas price volatilities, with the volatility of the credit spread, and as a function of the correlation between the spark spread and the counterparty credit spread
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