As the world faces the threat of climate change, investors and financial institutions are increasingly looking at investment portfolios’ carbon characteristics. We have identified three key elements that should be considered in order to avoid greenwashing in investment portfolios. First, we argue that investors and other stakeholders should differentiate between financed emissions representing financial instruments’ exposures to greenhouse gas emissions and real emissions generated by companies through their business activities and released into the atmosphere. Second, we show that carbon accounting must rely on the economic exposure of all financial instruments to determine the overall financed emissions of portfolios. Finally, we discuss the fact that the overall amount of financed emissions should always be equal to the amount of real emissions of a company.
This paper presents a new model for assessing the impact of collateral margin on derivative markets. The model allows us to decompose market prices into credit risk factors. We find empirical evidence that credit risk alone is not overly important in determining credit-related spreads. Only accounting for both collateral posting and credit risk can sufficiently explain unsecured credit costs. We also find that a poorly designed collateral agreement may increase credit risk. This finding suggests that failure to properly account for collateralization may result in significant mispricing of derivatives.
This paper presents an integrated model for credit risk and credit valuation adjustment. By taking into account distance-to-default, credit migration, default probability, survival probability, and default correlation, we obtain more realistic estimates of credit valuation adjustment and wrong way risk. The numerical study shows that the model results are very close to the market observed results, indicating that the model performs quite well. The numerical results corroborate the theoretical prediction on credit spreads and default correlations.
Equity-linked notes are flexible financial products that give investors favorable capital treatment. The payoff of a note depends on the performance of a basket of equities or indices averaged over a certain period, but is bounced below by a guaranteed amount. This article presents a new model for valuing equity-linked notes. We derive analytical formulas for pricing the note and computing the corresponding hedge ratios. The model appears to be accurate over a wide range of valuation parameters based on numerical studies. Finally, we use our model to value a segregated fund with a guarantee amount at maturity.
