ISSN:
1573-7144
Keywords:
Default
;
Creditworthiness
;
Options
;
Margin Requirements
;
Risk Management
;
Default Premium
;
Hedging
;
Derivatives
;
Forwards
Source:
Springer Online Journal Archives 1860-2000
Topics:
Economics
Notes:
Abstract This paper addresses the valuation and behavior of European options subject to intertemporal writer default risk. The framework allows the timing of default and recovery value to be uncertain. Default is said to occur if the writer's creditworthiness violates a specified critical level-both stochastic. Various recovery scenarios are considered including linking recovery to the moneyness of the option at the time of default. In an application of the model, it is estimated that current customer margin requirements for exchange-traded options are set far in excess of the fair market value.
Type of Medium:
Electronic Resource
URL:
http://dx.doi.org/10.1007/BF01536394
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