An equilibrium pricing for OTC derivatives with non-cash collateralisation
by Kazuhiro Takino
International Journal of Financial Markets and Derivatives (IJFMD), Vol. 6, No. 4, 2018

Abstract: In this study, we propose an equilibrium pricing rule for contingent claims traded in over-the-counter (OTC) markets with non-cash collateralisation. Owing to counterparty risks in OTC markets, collateral is required to create a derivative contract. In 2017, Osaka Exchange decided to expand the type of collateral asset, while cash has always been used as a collateral. In this study, we consider a market model in which the required collateral is not cash, and is instead assets with a senior credit class, such as a US Government bond. We further assume that market participants source collateral from the repurchase market (SC repo), where investors can borrow assets. Therefore, we provide an equilibrium pricing model that includes the repo market under counterparty risk. Our pricing rule also determines an equilibrium volume for the derivative contract. This enables us to examine the effects of the repo market on the price and volume for OTC derivative transactions.

Online publication date: Mon, 21-Jan-2019

The full text of this article is only available to individual subscribers or to users at subscribing institutions.

 
Existing subscribers:
Go to Inderscience Online Journals to access the Full Text of this article.

Pay per view:
If you are not a subscriber and you just want to read the full contents of this article, buy online access here.

Complimentary Subscribers, Editors or Members of the Editorial Board of the International Journal of Financial Markets and Derivatives (IJFMD):
Login with your Inderscience username and password:

    Username:        Password:         

Forgotten your password?


Want to subscribe?
A subscription gives you complete access to all articles in the current issue, as well as to all articles in the previous three years (where applicable). See our Orders page to subscribe.

If you still need assistance, please email subs@inderscience.com