Quantifying Option Credit Risk
Over-the-counter options can be bought and sold on any instrument and can be constructed to provide virtually any type of payoff or protection profile; as such, options are often considered the fundamental building blocks of custom derivative packages. Given the importance of options in the financial markets we develop, in this chapter, an REE method for estimating credit risk in standard option contracts; equations developed in this chapter are applied to option products and strategies analyzed in Chapters 4, 5 and 7.
KeywordsCredit Risk Market Risk Strike Price Sensitivity Approach Option Contract
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