Warehousing credit risk: pricing, capital and tax

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

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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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