Timeline for How to interpret the (expected) exposure and CVA of an option or a single share
Current License: CC BY-SA 4.0
10 events
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| Jun 27, 2019 at 20:40 | comment | added | Charlie Shuffler | @DaneelOlivaw Hey, I'm back on this question as it's my only way of contacting you. Is there any way you would have time to get into the quant.stackexchange chat room, so that I could pick your brain a little more on the intuition behind some concepts related to these? Hope I don't come off as rude, feel free to decline/ignore. | |
| Jun 21, 2019 at 8:52 | comment | added | byouness | To add to Daniel's answer, Counterpart Credit Risk is very specific. It is not the same thing as default risk for a bond or a stock. When you own a stock, you have a share of company, there is no counterparty here. The risk you have in this case is that the company's value drops (or that it eventually goes bankrupt and ceases to exist). For an OTC option, you have a contract with a counterparty that could default on the payoff payment when the time comes. This CCR is specific to the counterparty, and has nothing to do with the option value. | |
| Jun 21, 2019 at 6:48 | comment | added | Vitomir | Agree with Daniel, but for shares simply turn to VaR and Expected Shortfall! | |
| Jun 20, 2019 at 22:22 | comment | added | Daneel Olivaw | You’re welcome. | |
| Jun 20, 2019 at 22:20 | vote | accept | Charlie Shuffler | ||
| Jun 20, 2019 at 22:20 | comment | added | Charlie Shuffler | Alright that makes sense. Thank you very much for the detailed explanation! | |
| Jun 20, 2019 at 22:17 | comment | added | Daneel Olivaw | As far as I know, you would not take into acccount the share. In practice, a bank trades an option with a counterparty with which in has a netting agreement, namely a set of deals with common rules about collateral and what protocol to follow in case one of the two defaults. A share would not be included in such a netting set because it is not a deal between two counparties, rather a property title of one party over another. Thus that situation would not occur often. If it did, my opinion is CVA should not be calculated for a share because the share price already captures default risk. | |
| Jun 20, 2019 at 22:08 | history | edited | Daneel Olivaw | CC BY-SA 4.0 |
added 218 characters in body
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| Jun 20, 2019 at 22:07 | comment | added | Charlie Shuffler | Thanks alot for the clarifications. I am in a setting where I have both an option and a stock in a portfolio, and am trying to compute the $EE(t)$ of the whole portfolio. How would you deal with the share in that situation? Just omit it completely in computing the EE or CVA or do you account for it in some other way? Because I feel like when talking about purchasing a whole portfolio like that there has to be accounted for the stock also. | |
| Jun 20, 2019 at 22:01 | history | answered | Daneel Olivaw | CC BY-SA 4.0 |