margining in derivatives markets and the stability of the banking sector we investigate the effects of margining a widely used mechanism for attaching collateral to derivatives contracts on derivatives trading volume default risk and on the welfare in the banking sector first we develop a stylized banking sector equilibrium model to develop some basic intuition of the effects of margining we find that a margin requirement can be privately and socially sub optimal subsequently we extend this model into a dynamic simulation model that captures some of the essential characteristics of over the counter derivatives markets contrarily to the common belief that margining always reduces default risk we find that there exist situations in which margining increases default risk reduces aggregate derivatives trading volume and has an ambiguous effect on welfare in the banking sector the negative effects of margining are exacerbated during periods of market stress when margin rates are high and collateral is scarce we also find that central counterparties only lift some of the inefficiencies caused by margining

swap rates and credit quality this article presents a model for valuing claims subject to default by both contracting parties such as swaps and forwards with counterparties of different default risk the promised cash flows of a swap are discounted by a switching discount rate that at any given state and time is equal to the discount rate of the counterparty for whom the swap is currently out of the money that is a liability the impact of credit risk asymmetry and of netting is presented through both theory and numerical examples which include interest rate and currency swaps this article presents a model for valuing claims subject to default by both contracting parties such as swaps and forwards this extends the valuation model for defaultable claims proposed by duffie and singleton 1994 to cases in which the two counterparties have asymmetric default risk the extension permits a reexamination of the impact of credit risk on swap rates while the valuation model applies to all forms of contingent claims in which both contracting parties are at risk to default such as forward contracts we focus on swaps for purposes of illustration for example consider a 5 year interest rate swap between a given party paying a floating rate such as the london inter bank offered rate libor and another counterparty paying a fixed rate replacing the given fixed rate counterparty with a lower quality counterparty whose bond yields are 100 basis points higher increases the swap rate by roughly 1 basis point using our model and typical parameters for libor rate processes this credit impact on swap rates is approximately linear within the range of normally encountered credit quality for a 5 year currency swap given a foreign exchange rate with 15 percent volatility our model shows the impact of credit risk asymmetry on the market swap rate to be roughly 10 fold greater than that for interest rate swaps that is approximately 10 basis points in swap rate per 100 basis points in bond yield credit spread the main goal of this article is to provide a simple and theoretically consistent model allowing such computations

50th anniversary article option pricing valuation models and applications this paper surveys the literature on option pricing from its origins to the present an extensive review of valuation methods for european and american style claims is provided applications to complex securities and numerical methods are surveyed emphasis is placed on recent trends and developments in methodology and modeling

default risk and the effective duration of bonds default risk creates difficulties for fixed income portfolio managers in measuring a portfolio s exposure to interest rate risk it also heightens the anxiety of traders and arbitragers who are hedging their investments and it compounds financial institutions problem of matching assets and liabilities the consensus among researchers is that credit risk shortens the effective duration of corporate bonds this paper provides estimates of how much shorter durations become because of credit risk these estimates are based on observable data and easily estimated bond pricing parameters because the duration measures are taken with respect to movements in a common reference rate of interest they can be used with greater confidence than can other measures when attempting to compute the duration of a portfolio of bonds subject to varying degrees of credit risk

credit risk measurement developments over the last 20 years abstract this paper traces developments in the credit risk measurement literature over the last 20 years the paper is essentially divided into two parts in the first part the evolution of the literature on the credit risk measurement of individual loans and portfolios of loans is traced by way of reference to articles appearing in relevant issues of the journal of banking and finance and other publications in the second part a new approach built around a mortality risk framework to measuring the risk and returns on loans and bonds is presented this model is shown to offer some promise in analyzing the risk return structures of portfolios of credit risk exposed debt instruments

assessing credit risk in a financial institution s off balance sheet commitments the first part of this paper presents a general approach to valuing a financial institution s contracts when there is credit risk the approach uses contingent claims pricing theory and is particularly appropriate for an off balance sheet contract such as a swap that can have either a positive or a negative value to the counterparty the second part of the paper extends the analysis by considering the problem faced by bank supervisory authorities of determining capital requirements for off balance sheet contracts

myths and facts of the utility death spiral abstract as the electricity industry is changing worldwide the swift expansion of basic forms of distributed generation dg particularly photovoltaic deployment threatens the current utility business models that during the transitional stages may challenge the reliability of electricity systems and societal welfare these findings are matters of major concern to policy makers as the shift towards more decentralized power systems must be sustainable and although this brings great opportunities it also pauses important challenges the transition calls for policy and regulation attention for some researchers dg development should be accompanied with design changes to distribution tariffs the addition of connection charge and modifications to net metering while for others certain of these measures could discourage dg investments in this context and given multiple uncertainties the authors propose a system dynamics model to examine the effect of the diffusion of photovoltaic technology on the revenues of utilities and customers the paper concludes that for the colombian case it is possible under certain conditions to attain a balance between social welfare and the aversion of the utility death spiral through systemic interventions

regional distribution effects of different electricity network tariff designs with a distributed generation structure the case of germany abstract the growing share of distributed generation and the corresponding need for grid extensions are anticipated to considerably influence electricity grid tariffs in the future depending on the regulatory framework and demand structure of the respective country the necessary expansion measures being taken are disparately affecting different regions with the underlying public support for the energy system transformation taking place across europe crucial to its success mechanisms to facilitate a cost reflective and non discriminatory cost distribution should be investigated based on a classification of critical factors responsible for regional discrepancies we model and estimate residential customers tariffs in germany and their regional distributional disparities while assessing various reform measures the findings show that the overall tariff rates in germany and the already existing regional disparities are poised to increase substantially by 2025 a tariff corridor and deep first connection charges considerably limit tariffs and increase distributional equity amongst regions a generation tariff alters the distribution and reduces the highest tariffs an energy based tariff that neglects the impact of prosumers further aggravates the regional distributional disparities this paper gives insights into the challenges of cost allocation within electricity grids and intends to help to design an adequate and fair cost allocation mechanism

spillover effects of distribution grid tariffs in the internal electricity market an argument for harmonization abstract in many countries distribution grid tariffs are being reformed to adapt to the new realities of an electricity system with distributed energy resources in europe legislative proposals have been made to harmonize these reforms across country borders many stakeholders have argued that distribution tariffs are a local affair while the european institutions argued that there can be spillovers to other countries which could justify a more harmonized approach in this paper we quantify these spillovers in a simplified numerical example to give insight and an order of magnitude we look at different scenarios and find that the spillovers can be both negative and positive to be able to quantify these effects we developed a long run market equilibrium model that captures the wholesale market effects of distribution grid tariffs the problem is formulated as a non cooperative game involving consumers generating companies and distribution system operators in a stylized electricity market

the value of embedded real options evidence from consumer automobile lease contracts under the common assumption of constant interest rates we show that penalties for early termination of a lease are often structured in such a way that the cancellation option embedded in consumer automotive leases has little value furthermore our estimates drawn from a sample of three popular car models over 1990 to 2000 indicate that the stand alone value of the lease end purchase option is on average about 16 of the market value of underlying used vehicles or about 1 462 per contract finally we examine the sensitivity of our option value estimates to model parameters and default risk recent years have witnessed a dramatic growth in the leasing of automobiles for instance overall industry sales data indicate that about a third of the new vehicles and trucks sold in the united states are leased hendel and lizzeri 2002 and miller 1995 and the federal reserve board survey of family finances reports that the use of leased vehicles by individuals nonbusiness consumers has risen from 2 9 to 5 8 over the 1992 to 2001 period azicorbe kennickell and moore 2003 consumer automobile lease contracts for new cars often include two embedded options that are not associated with a typical debt contract the first is a cancellation option that allows the lessee to terminate the lease early the second is a european call option which gives the lessee the right but not the obligation to purchase the leased used vehicle at the scheduled termination of the lease at a predetermined exercise price both of these options are simple examples of real options because the asset underlying these options is a used car that is a real asset however these options constitute a special case of real options since they are embedded in the lease contract which is a financial credit instrument theoretical analyses of lease contracts show that the cancellation option is quite valuable schallheim and mcconnell 1985 with respect to the purchase option hendel and lizzeri 2002 argue that they can play an important role in

solar feed in tariffs examining fair and reasonable retail rates using cost avoidance estimates abstract growing solar photovoltaic pv electricity systems in geographically diverse regions presents a complex policy problem for governments during 2013 16 the queensland government in australia examined establishing a fair and reasonable retail feed in tariff fit policy noting it regulates state retail electricity consumption prices a combined cost avoidance and stakeholder analysis was applied to show that determination of a fair and reasonable fit for all stakeholders while aspirational is difficult to achieve typically agreement on a fair tariff rate will depend on stakeholders relative position in energy supply chains service providers retailers suppliers customers advocates and interpretations of fairness that can be shaped by competition in the supply area also increases in financial benefits to pv customers might be considered unreasonable by non pv customers and retailers that experience increases in electricity prices and operating costs importantly the application of a retail fit in regional and isolated areas requires careful energy policy design taking account of network losses remote and isolated customer metering cost effective network control technologies and diesel generator operating limits the study also observed that shifting funding of fit schemes from electricity distributors to competitive retailers will likely have negative consequences for retail fit offerings and pv customer servicing

towards a cost causation based tariff for distribution networks with dg this paper decomposes the effects of the transition from an average cost distribution tariff to a cost causation based distribution tariff in terms of time and location that uses nodal prices to recover losses and an extent of use method to recover fixed network costs based on use at coincident peak our decomposition is designed so that the effects of using coincident peak and location for fixed network charges as well as using marginal losses under constraints recovering the exact amount of losses and recovering exactly the cost of network service in total can be isolated and analyzed separately we apply our tariff transition and decomposition method to an example network with data from uruguay to isolate the various effects with and without a distributed generation dg resource we show moving to coincident peak charges and to fully charging for marginal losses while rebating the merchandising surplus through the fixed charges have the greatest effects on changes in distribution tariff charges dg provides countervailing cost changes to distribution tariffs for loads through loss reductions and the implicit creation of new network capacity for which it is paid the interaction of all these effects may lead to outcomes that are counter intuitive which further supports the need to decompose the tariff changes to fully understand the reasons for the direction and magnitude of changes in tariff charges in the transition to tariffs based more on cost causation

default risk yield spreads and time to maturity this paper extends the default model of yield spreads for bonds by showing that in gen eral they are a complex function of maturity and in particular are not always monotoni cally increasing contrary to what one traditional view suggests our results may help explain the apparently conflicting empirical results found in the literature

peak shifting and cross class subsidization the impacts of solar pv on changes in electricity costs abstract the expansion of distributed solar necessitates additional research into the impacts on both utilities and their customers in this paper we use new jersey solar data pjm market data and demand profiles from a pjm utility to investigate rate and bill impacts of large scale solar penetration in addition to the subsidization of solar adopters by non participants we highlight the channels through which cross subsidization of rate classes can arise in practice the results of our study indicate that the fear of a utility death spiral may be exaggerated significant solar can be incorporated with only a 2 increase in non participant bills at high levels of penetration distributed solar has the potential to alter the system peak hour which affects the allocation of costs across rate classes as the peak hour shifts to the evening when solar production diminishes residential customers face higher distribution costs policy makers and utilities need to be aware of these challenges in designing the next generation of rates that are better aligned with cost causality

photovoltaic electricity production in brazil a stochastic economic viability analysis for small systems in the face of net metering and tax incentives abstract currently in addition to the search for sustainable development there is increased pressure for a change in consumption and production of energy patterns in brazil in this scenario net metering is an important mechanism fostering dissemination of small photovoltaic pv solar systems as complementary support to net metering a tax exemption is currently being offered in some brazilian states thus the objective of the present study is to analyze the impact of tax exemption on the circulation of goods and services and the returns and risks of the pv microgeneration project in four cities located in different regions of brazil belem petrolina uberaba and uruguaiana the analysis is performed using the monte carlo simulation mcs wherein uncertainties related to the financial and environmental variables are considered the results of the stochastic economic viability analysis allowed us to conclude that the exemption of tax on circulation of goods and services icms is fundamental to make pv microgeneration viable in brazil in the cities analyzed pv microgeneration presented economic unfeasibility to the investor when the icms is charged when considering the icms exemption policy the cities of petrolina and belem obtained high probabilities of viability in relation to the risk analysis pv microgeneration obtained the best results in petrolina both in terms of the condition of collection and exemption of icms there is high potential for harness solar throughout the brazilian territory however due to the current evolution stage and the productive chain of the brazilian pv industry high costs limit the expansion of this clean energy generation technology the findings of this study could assist policymakers in evaluating this incentive program highlighting that this tax exemption directly meets one of the objectives for which the icms was created which is to encourage the development of productive sectors such as pv industry

on the efficiency of connection charges part ii integration of distributed energy resources this two part paper addresses the design of retail electricity tariffs for distribution systems with distributed energy resources ders part i presents a framework to optimize ex ante two part tariffs for a regulated retailer who faces stochastic wholesale prices on the one hand and stochastic demand on the other in part ii the integration of ders is addressed by analyzing their effect on the optimal two part tariff and the induced welfare gains two der integration models are considered a decentralized model involving behind the meter ders and a centralized model with retailer integrated ders it is shown that ders integrated under either model can achieve the same social welfare and that net metering is optimal the retail prices for both models are equal and reflect the expected wholesale prices the connection charges differ and are affected by the retailer s fixed costs and the statistical dependencies between wholesale prices and behind the meter ders these charges are higher under the decentralized model an empirical analysis is presented to estimate the impact of der on welfare distribution and cross subsidies it shows that with the prevailing net metering tariffs consumer welfare decreases with the level of der integration issues of cross subsidy and practical drawbacks of decentralized integration are also discussed

the default risk of swaps we characterize the exchange of financial claims from risky swaps these transfers are among three groups shareholders debtholders and the swap counterparty from this analysis we derive equilibrium swap rates and relate them to debt market spreads we then show that equilibrium swaps in perfect markets transfer wealth from shareholders to debtholders in a simplified case we obtain closed form solutions for the value of the default risk in the swap for interest rate swaps we obtain numerical solutions for the equilibrium swap rate including default risk we compare these with equilibrium debt market default risk spreads swaps have been one of the most explosive and important innovations in international capital markets in the last 10 years in its simplest form a swap consists of an agreement hetween two entities called counterparties to exchange in the future two streams of cash flows in a currency swap these streams of cash flows consist of a stream of interest and principal payments in one cvtrrency exchanged for a stream of interest and principal payments of the same maturity in another currency in an interest rate swap they consist of streams of interest payments of one type fixed or floating exchanged for streams of interest payments of the other type in the same currency the two types of swap are shown in appendix 1 the economic importance of swap transactions is the fact that they can he comhined with deht issues to change the nature of the liahility for the borrower the sum of a hond issue and a currency swap gives a net liability stream which is equivalent to transforming the bond liability into a different currency a floating rate note combined with an interest rate swap results in a liability equivalent to fixed rate debt two issues have dominated the academic literature on swaps the first concerns the reasons for their use arbitrage of imperfections in capital markets was the original cause of their appearance price and henderson 1984 turnbull 1987 shows that lowering borrowing costs by a synthetic transaction involving a swap is not possible in a complete integrated capital market subsequent authors wall and pringle 1988 arak estrella groodman and silver 1988 smith smithson and wakeman 1987 observe

the use of the control variate technique in option pricing this paper presents a generalized version of the lattice approach to pricing options it shows how the control variate technique can produce significant improvements in the effi ciency ofthe approach the control variate technique is illustrated using american puts on dividend and nondividend paying stocks

residential energy efficiency and distributed generation natural partners or competition abstract residential energy efficiency and distributed generation seem to be natural partners in our journey towards a more sustainable energy future a growing range of energy efficient consumer technologies and extraordinary declines in photovoltaics system prices has seen household electricity demand fall whilst a growing proportion of the remaining load is provided by household self generation australia is a particularly interesting example of these developments with around 15 of households now possessing a pv system while per capita household demand has also fallen markedly however existing retail electricity tariffs and regulatory arrangements can create mixed incentives for households contemplating both pv and energy efficiency options and for their network service providers this is certainly the case in australia with net metering arrangements that value self consumption of pv far more than pv exports to the grid there are also complex benefits for the electricity network created by these household energy resources that can be significant in this paper we use real household load and pv data from sydney households to model the potential implications of existing electricity tariff arrangements on the financial attractiveness of pv and energy efficiency we model these options separately and in combination for both households implementing these options and their network service providers our results highlight how inappropriate tariffs may well adversely impact on the value that the combination of energy efficiency and pv offers not only to households but also to their network service providers and suggest ways that such impacts might be ameliorated by acknowledging the benefits that these resources can offer to the electricity network

the tax dis advantage of a firm issuing options on its own stock abstract it is common for firms to issue or purchase options on the firm s own stock examples include convertible bonds warrants call options as employee compensation and the sale of put options as part of share repurchase programs this paper shows that option positions with implicit borrowing such as put sales and call purchases are tax disadvantaged relative to the equivalent synthetic option with explicit borrowing conversely option positions with implicit lending such as warrants are tax advantaged i also show that firms are better off from a tax perspective issuing bifurcated convertible bonds bonds plus warrants rather than an otherwise equivalent standard convertible

the analytic pricing of asymmetric defaultable swaps swaps where both parties are exposed to credit risk still lack convincing pricing mechanisms this article presents a reduced form model where the event of default is related to structural characteristics of each party the cash flows submitted to credit risk are identified before the swap is priced analytical pricing formulas for interest rate and currency swaps are computed using a gaussian model for risky bonds currency swaps exhibit additional correlation risk the benefits from netting depend on the balance between exposures and market conditions in valuation we show that sources of credit risk asymmetries are also likely to impact on credit spreads

the price setting behavior of banks an analysis of open end leverage certificates on the german market abstract this paper presents the first analysis of open end leverage certificates on the german market the major innovations of these certificates are twofold first issuers announce a price setting formula according to which they are willing to buy and sell the certificates over time second the product s lifetime is potentially endless our main findings are that the price setting formula is i designed to strongly favor the issuer and ii is consistent with the main outcome of the life cycle hypothesis for structured financial products stoimenov p a wilkens s 2005 are structured products fairly priced an analysis of the german market for equity linked instruments journal of banking and finance 29 2971 2993 iii this holds for different product features and also in the presence of issuers credit risk and jump risk in the underlying

the impact of default risk on the prices of options and other derivative securities abstract this paper presents a model for valuing derivative securities when there is default risk the holder of a security is assumed to recover a proportion of its no default value in the event of a default by the counterparty both the probability of default and the size of the proportional recovery are random the paper shows how data on bonds issued by the counterparty can be used to provide information about model parameters

continuous time methods in finance a review and an assessment i survey and assess the development of continuous time methods in finance during the last 30 years the subperiod 1969 to 1980 saw a dizzying pace of development with seminal ideas in derivatives securities pricing term structure theory asset pricing and optimal consumption and portfolio choices during the period 1981 to 1999 the theory has been extended and modified to better explain empirical regularities in various subfields of finance this latter subperiod has seen significant progress in econometric theory computational and estimation methods to test and implement continuous time models capital market frictions and bargaining issues are being increasingly incorporated in continuous time theory the roots of modern continuous time methods in finance can be traced back to the seminal contributions of merton 1969 1971 1973b in the late 1960s and early 1970s merton 1969 pioneered the use of continuous time modeling in financial economics by formulating the intertemporal consumption and portfolio choice problem of an investor in a stochastic dynamic programming setting merton 1973b also showed how such a framework can be used to develop equilibrium asset pricing implications thereby significantly extending the asset pricing theory to richer dynamic settings and expanding the scope of applications of continuous time methods to study problems in financial economics 1 within a span of about 30 years from the publication of merton s inf luential papers continuous time methods have become an integral part of financial economics indeed in certain core areas in finance such as e g asset pricing derivatives valuation term structure theory and portfolio selection continuoustime methods have proved to be the most attractive way to conduct research and gain economic intuition the continuous time approach in these areas has produced models with a rich variety of testable implications the econometric theory for testing continuous time models has made rapid strides in the last decade and has thus kept pace with the impressive progress on the theoretical front one hopes that the actual empirical investigations and estimation using the new procedures will follow suit soon

taxes default risk and yield spreads this paper develops a model of bond prices and yield spreads that incorporates the effect of both taxes and differences in default probabilities the tax loss consequences of default are recognized traditionally tax free municipal bond yields have been viewed as linearly related to taxable yields with a slope coefficient equal to one minus the tax rate and the intercept representing differences in default risk while our model supports the linearity assumption it implies that the slope and intercept are both functions of both the break even tax rate and the default probability ies clientele effects among both municipal and taxable bonds are demonstrated finally the implied marginal tax rates and the implied default probabilities are estimated for different categories of municipal bonds students of financial markets cannot help but be impressed by the number of new financial instruments that have been introduced successfully in recent years the fixed income market has been particularly innovative as bonds carrying a whole host of specific features have been successfully marketed bonds with small or zero coupons variable coupon rates or detachable warrants are three examples from among an expanding list of such features not surprisingly there has developed a large and expanding literature attempting to explain the rate spreads between different fixed income securities this literature has evolved much as one would expect early empirical work was in general not well founded in theory and was not based on an underlying expected return price model later empirical research has tended to be more careful in its specification of factors affecting yield spreads and as a consequence better founded in valuation

hidden financial implications of the net energy metering practice in an isolated power system critical review and policy insights abstract this paper provides useful insights regarding the financial implications of the currently applied net energy metering nem practice in cyprus through analyzing the implemented policy under a the customers perspective and b the utility electricity authority of cyprus perspective these two perspectives are known in the scientific literature as the participant cost test and the utility cost test respectively within the paper the financial analysis from the customers perspective it embraces the impact resulting from a series of factors influencing the viability of net metered pv systems investments furthermore the analysis from the utility s perspective relates to the expected costs and benefits that eac may experience due to the current nem rules and applied charges finally the key findings pertaining to the current nem policy s hidden financial and policy implications are critically discussed this discussion is performed to facilitate a more diligent nem policy that will allow further penetration of roof top pv systems through well informed and transparent decisions

analysis of reflectivity predictability of electricity network tariff structures for household consumers distribution network operators charge household consumers with a network tariff so they can recover their network investment and operational costs with the transition towards a sustainable energy system the household load is changing through the introduction of photovoltaics and electric vehicles the tariff structures which are currently employed in the eu are either capacity and or energy consumption based in light of the changes in the household load the question whether these tariff structures are the most suitable merits renewed attention in this work the cost reflectivity of various tariff structures has been computed based on a distribution network planning approach next to this the predictability of a network tariff i e how much change would a household experience in network charges in two consecutive years has also been computed to gain insight into how well users will be able to react to the tariff the results show that a peak load based network tariffs score best on the reflectivity while having an acceptable level of predictability the switch from an energy consumption based network tariff which is now most often applied towards a peak load based network tariff should therefore be considered

squaring the sunny circle on balancing distributive justice of power grid costs and incentives for solar prosumers abstract solar prosumers are about to revolutionize the power sector utilities are challenged in recovering the costs of distribution grids as parts of their revenue basis decreases through self consumption adjusting the grid tariff sets off a reinforcing feedback loop that increases the attractiveness of solar investments but also leads to a distribution effect between solar prosumers and conventional consumers the question is how to recover distribution grid costs equitable without hampering the diffusion of solar power can the two criteria be fulfilled at the same time or is do we aim for squaring a circle to address this question i present a system dynamics simulation model designed to understand the interactions and assess these competing goals the occurring distribution effect under the volumetric grid tariff with net purchase and sale appears to be rather limited simulation experiments reveal that grid tariff designs strongly influence investments for solar power a capacity tariff can reduce deviations from the cost causation principle of solar prosumers and incentivizes investments in decentralized storage solutions to reduce peak demand nevertheless also the capacity tariff causes a distribution effect

long run incremental cost pricing based on unused capacity this paper proposes a novel approach for providing long run incremental cost lric pricing in network charges the proposed approach makes use of the unused capacity of an exiting network to reflect the cost of advancing or deferring future investment consequent upon the addition of generation or load at each study node on a distribution network compared with existing approaches to lric pricing the proposed approach produces forward looking charges that reflect both the extent of the network needed to service the generation or load and the degree to which that network is utilized the efficacy of the proposed lric approach has been validated by a comparison with the established investment cost related pricing icrp method used for deriving transmission charges in great brain gb this paper draws on work undertaken in projects for western power distribution and ofgem office of gas and electricity markets u k however the views expressed in this paper are those of the authors

future proof tariff design recovering sunk grid costs in a world where consumers are pushing back abstract traditional analysis of distribution network tariff design assumes a lack of alternatives to grid connection for the fulfilment of consumers electricity needs this is radically changing with breakthroughs in two technologies 1 photovoltaics pv enable domestic and commercial consumers to self produce energy 2 batteries allow consumers and self producers to gain control over their grid energy and capacity parameters contributing to the state of the art the grid cost recovery problem for the distribution system operator dso is modelled as a non cooperative game between consumers in this game the availability and costs of the two named technologies strategically interact with tariff structures four states of the world for user s access to technologies are distinguished and three tariff structures are evaluated the assessed distribution network tariff structures are energy volumetric charges with net metering energy volumetric charges for both injection and withdrawal and capacity based charges results show that in a state of the world with new technology choices for grid users both efficiency and equity issues can arise when distribution network charges are ill designed

the pricing of leverage products an empirical investigation of the german market for long and short stock index certificates abstract this paper describes the first thorough empirical analysis of the pricing of leverage products in the german retail market these mainly exchange traded products with an impressive trading volume are frequently advertised as long and short futures contracts although they are theoretically equivalent to one sided barrier options issuers daily quotes for stock index products are compared to i theoretical values derived from the prices of eurex options and to ii boundaries obtained from semi static superhedging strategies for the vast majority of products bid and ask quotes significantly exceed both theoretical values and upper hedging boundaries thus providing almost risk free profits for the issuers

a two factor hazard rate model for pricing risky debt and the term structure of credit spreads this paper proposes a two factor hazard rate model in closed form to price risky debt the likelihood of default is captured by the firm s non interest sensitive assets and defaultfree interest rates the distinguishing features of the model are threefold first the impact of capital structure changes on credit spreads can be analyzed second the model allows stochastic interest rates to impact current asset values as well as their evolution finally the proposed model is in closed form enabling us to undertake comparative statics analysis compute parameter deltas of the model calibrate empirical credit spreads and determine hedge positions credit spreads generated by our model are consistent with empirical observations

are structured products fairly priced an analysis of the german market for equity linked instruments abstract based on a unique data set this paper examines the pricing of equity linked structured products in the german market the daily closing prices of a large variety of structured products are compared to theoretical values derived from the prices of options traded on the eurex european exchange for the majority of products the study reveals large implicit premiums charged by the issuing banks in the primary market a set of driving factors behind the issuers pricing policies is identified for example underlying and type of implicit derivative s for the secondary market the product life cycle is found to be an important pricing parameter

on measuring credit risks of derivative instruments abstract this paper critically reviews current practices for measuring credit risks of derivative instruments it argues that there are two major problems with the standard measurement approach first it uses models of the stoachstic behavior of finanacial variables while ignoring both their inherent oversimplification and the uncertainty in their parameters second it ignores the correlations among exposures in derivative intruments and the probabilities of countrypartly default this paper deomonstrates that these practices can produce large errors in the estimation of distribution of both future credit exposures and future credit losses

the economic effect of electricity net metering with solar pv consequences for network cost recovery cross subsidies and policy objectives abstract net metering is commonly known as a practice by which owners of distributed generation dg units may offset their electricity consumption from the grid with local generation the increasing number of prosumers consumers that both produce and consume electricity with solar photovoltaic pv generation combined with net metering results in reduced incomes for many network utilities worldwide consequently this pushes utilities to increase charges per kw h in order to recover costs for non pv owners this could result into inequality issues due to the fact that also non pv owners have to pay higher chargers for their electricity consumed to make up for netted costs of pv owners in order to provide insight in those inequality issues caused by net metering this study presents the effects on cross subsidies cost recovery and policy objectives evolving from different applied netmetering and tariff designs for a residential consumer eventually this paper provides recommendations regarding tariffs and metering that will result in more explicit incentives for pv instead of the current implicit incentives which are present to pv owners due to net metering

the intersection of market and credit risk abstract economic theory tells us that market and credit risks are intrinsically related to each other and not separable we describe the two main approaches to pricing credit risky instruments the structural approach and the reduced form approach it is argued that the standard approaches to credit risk management creditmetrics creditrisk and kmv are of limited value when applied to portfolios of interest rate sensitive instruments and in measuring market and credit risk empirically returns on high yield bonds have a higher correlation with equity index returns and a lower correlation with treasury bond index returns than do low yield bonds also macro economic variables appear to influence the aggregate rate of business failures the creditmetrics creditrisk and kmv methodologies cannot reproduce these empirical observations given their constant interest rate assumption however we can incorporate these empirical observations into the reduced form of jarrow and turnbull 1995b drawing the analogy risk 5 63 70 model here default probabilities are correlated due to their dependence on common economic factors default risk and recovery rate uncertainty may not be the sole determinants of the credit spread we show how to incorporate a convenience yield as one of the determinants of the credit spread for credit risk management the time horizon is typically one year or longer this has two important implications since the standard approximations do not apply over a one year horizon first we must use pricing models for risk management some practitioners have taken a different approach than academics in the pricing of credit risky bonds in the event of default a bond holder is legally entitled to accrued interest plus principal we discuss the implications of this fact for pricing second it is necessary to keep track of two probability measures the martingale probability for pricing and the natural probability for value at risk we discuss the benefits of keeping track of these two measures

an integrated pricing model for defaultable loans and bonds abstract in recent years credit risk has played a key role in risk management issues practitioners academics and regulators have been fully involved in the process of developing studying and analysing credit risk models in order to find the elements which characterize a sound risk management system in this paper we present an integrated model based on a reduced pricing approach for market and credit risk its main features are those of being mark to market and that the spread term structure by rating class is contingent on the seniority of debt within an arbitrage free framework we introduce issues such as the integration of market and credit risk the use of stochastic recovery rates and recovery by seniority moreover we will characterize default risk by estimating migration risk through a mortality rate actuarial based approach the resultant probabilities will be the base for determining multi period risk neutral transition probability that allow pricing of risky debt in the trading and banking book

the implied reserves of the bank insurance fund abstract option models of deposit insurance pricing view assessment rates as put option premiums however such models ignore the risk of guaranty fund default this paper attempts to link risk based premiums with guaranty fund reserves in a partial equilibrium setting by employing a methodology based on options with credit risk the value of full insurance per coverage period is expressed as a standard options premium and is decomposed into two parts the explicit part is due to the available assets reserves of the guaranty fund while the implicit part comes from federal support contingent on the adequacy of reserves at the end of the coverage period implied reserves are derived under an exogenous insurance coverage rate as a policy parameter the method is illustrated on a sample of 40 large bank holding companies and an extension to the case of several insured banks is provided

evaluation of counterparty risk for derivatives with early exercise features abstract we introduce an efficient numerical approach to evaluate counterparty risk and we compute the credit valuation adjustment for derivatives having early exercise features the approach is flexible and can account for wrong way risk and various models for the underlying risk factor s dynamics numerical experiments are presented to illustrate the efficiency and versatility of the method

the pricing of options with default risk this paper considers the pricing of options with default risk the comparative statics of such options can differ from those of ordinary options and early exercise of such american call options can be optimal several examples of options with default risk are considered traditionally it has been assumed that options have no default risk such an assumption is reasonable when one studies options traded on an organized exchange in the u s default on such options would require as cox and rubinstein 5 put it a very sudden and strong movement in stock prices one considerably more extreme than any on record p 71 however many options and financial assets containing option like payoffs are sold by firms that have limited assets for such options default is often a possibility that must be taken seriously in this paper we study how options subject to default risk which we hereinafter call vulnerable options are priced it turns out that many of the well established results of the option pricing literature see e g smith 12 and references therein do not hold for vulnerable options in particular the value of a vulnerable european option can fall with time to maturity with the interest rate and with the variance of the underlying asset furthermore it may pay to exercise early a vulnerable american option on a non dividend paying asset

pricing effects when competitors arrive the case of discount certificates in germany this article investigates how overpricing of outstanding certificates also called master certificates changes when competing products that duplicate the features of master certificates are issued i argue that competition effects may be reverted and overpricing may increase rather than decrease after competitors arrive when retail investors fail to detect implications of credit risk differences on certificates values using difference in differences estimations on matched samples i find that overpricing of master certificates decreases after the competing products have been issued but only when the master issuer s credit risk is lower than that of the duplicate issuer while it increases when the credit risk difference is positive these findings are robust to controlling for retail investors demand in various ways thus the study indicates that retail investors failure to detect the value implications of issuers credit risk can undermine product competition

the mismeasurement of risk investors typically measure risk as the probability of a given loss or the amount that can be lost with a given probability at the end of their investment horizons this view of risk considers only the final result but investors perceive or should perceive risk differently they are affected by exposure to loss throughout the investment period not just at its conclusion we introduce two new ways of measuring risk within horizon probability of loss and continuous value at risk that reveal that exposure to loss is substantially greater than investors normally assume

oil price hikes and development triggers in peace and war the theory of irreversible investment predicts that development of an oil field should take place when a unique price trigger is passed at the start of the 1990 91 gulf war however oil prices promptly doubled only to fall back to their previous level when peace returned six months later to incorporate such large but transitory price hikes we evaluate the profitability of an oil field contingent on war and peace and calculate separate triggers in each case for plausible parameter values we find that the switch between these development triggers is about 45 of the price hike caused by the war the price hike is therefore equivalent to a permanent price increase of only a quarter of its size copyright 1996 by royal economic society

evaluating the effect of technology transformation on the electricity utility industry abstract the technology shift from fossil fuelled systems to renewable energies has been promoted by governments with the purpose of decarbonising the power industry however rapid technology progress has prompted disruptive changes that transformed market structures incumbent electricity utilities particularly those based on fossil fuel plant are shifting from their stable and predictable situation to confront challenges from those that offer alternative energy services in this new environment the industry will benefit from mid to long term sector foresight the paper studies the potential impact of renewable energy sources res on electricity systems specifically on the generation and distribution businesses for this purpose a fairly detailed and integrated supply and demand based system dynamics model has been built to quantify the extent of their potential impact the model disaggregates the household sector which may generate a significant part of its electricity using rooftop solar energy this is illustrated by examining a utility engaged in the generation and distribution businesses in the colombian electricity market through simulation runs this paper concludes that subject to policy and all other things remaining equal solar rooftop generation is a major threat for utilities while the generation business is most affected in the short term the distribution business is the one most impacted in the long term and jointly they may induce the utility death spiral

designing more cost reflective electricity network tariffs with demand charges abstract there is growing policy and regulatory interest in better aligning electricity tariffs with the cost of providing network services to customers to provide a better price signal for economically efficient use of the network and reduce cross subsidies between different customers given that network costs are significantly driven by peak capacity requirements many proposals for more cost reflective tariffs include a demand capacity component however there are many complexities in the implementation of such tariffs this paper first presents a method to visually assess how cost reflective a particular demand charge network tariffs is we apply it to a typical demand charge network tariff proposal within the australian national electricity market and actual consumption data of 3876 sydney households and find it to have low cost reflectivity in terms of aligning customer bills with their contribution towards network peak demand such misalignment has potentially significant adverse impacts on the economic efficiency of such tariffs an issue that does not appear to have received sufficient policy attention we then use this assessment method to demonstrate how a demand charge tariff structure can be adjusted to make it significantly more cost reflective this method can be applied to any tariff that includes a capacity based component

pricing black scholes options with correlated credit risk abstract this paper presents an improved method of pricing vulnerable black scholes options under assumptions which are appropriate in many business situations an analytic pricing formula is derived which allows not only for correlation between the option s underlying asset and the credit risk of the counterparty but also for the option writer to have other liabilities further the proportion of nominal claims paid out in default is endogenous to the model and is based on the terminal value of the assets of the counterparty and the amount of other equally ranking claims numerical examples compare the results of this model with those of other pricing formulas based on alternative assumptions and illustrate how the model can be calibrated using market data

default risk in a market model abstract this paper presents a theoretical model of default risk in the context of the market model approach to interest rate dynamics we propose a model for finite interval interest rates such as libor which explicitly takes into account the possibility of default through the influence of a point process with deterministic intensity we relate the defaultable interest rate to the non defaultable interest rate and to the credit risk characteristics default intensity and recovery rate we find that the spread between defaultable and non defaultable rate depends on the non defaultable rate even when the default intensity is deterministic prices of a cap on the defaultable rate and of a credit spread option are derived we consider swaps with unilateral and bilateral default risk and derive the fair fixed swap rate in both cases under the condition that both counterparties are of the same risk class we show that for a monotonously increasing term structure the swap rate for a defaultable swap will lie below the swap rate for a swap without default risk