Warehousing credit risk: pricing, capital and tax

Kenyon and Green model the effects to pricing of credit warehousing, capital and tax



Credit valuation adjustments (CVA) apply to all counterparties with derivatives transactions that are marked to market; that is, those in the trading book. For most banks only a subset of these counterparties have liquid credit default swap (CDS) contracts available for hedging default risk (the US$ CDS market has only about 1,600 liquid contracts), so some credit risk is inevitably warehoused. Higher credit risk requires more capital. Open risk requires pricing in the

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