Don’t mind the gap risk: regulatory treatment of credit repacks
Gap risk in repackaging is not a credit valuation adjustment for Basel III capital purposes, argues senior quant Andrey Chirikhin
Credit repackaging deals – or credit repacks – have become popular yield enhancement products for investors. The essential part of valuing these deals is computing the embedded gap risk.
Because valuing gap risk is akin to computing a credit valuation adjustment (CVA), the industry has been questioning, in light of Basel III, whether gap risk is indeed CVA, and therefore what its regulatory
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