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- W3123048797 abstract "Although not a formal pricing consideration, gap risk or hedging errors are the norm of derivatives businesses. Starting with the gap risk during a margin period of risk of a repurchase agreement (repo), this article extends the Black-Scholes-Merton option pricing framework by introducing a reserve capital approach to the hedging error's irreducible variability. An extended partial differential equation is derived with two new terms for expected gap loss and economic capital charge, leading to the gap risk economic value adjustment and capital valuation adjustment (KVA) respectively. Practical repo pricing formulae is obtained showing that the break-even repo rate decomposes into cost of fund and economic capital charge in KVA. At zero haircut, a one-year term repo on main equities could command a capital charge as large as 50 basis points for a 'BBB' rated borrower." @default.
- W3123048797 created "2021-02-01" @default.
- W3123048797 creator A5045004621 @default.
- W3123048797 date "2016-04-19" @default.
- W3123048797 modified "2023-09-27" @default.
- W3123048797 title "Gap Risk KVA and Repo Pricing: An Economic Capital Approach in the Black-Scholes-Merton Framework" @default.
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- W3123048797 hasPublicationYear "2016" @default.
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