G13 - Contingent Pricing; Futures Pricing; option pricingReturn

The paper deals with the optimal strategy for entering a derivative contract under existence of counterparty credit risk. Derivative contracts can be traded in three ways - bilaterally without any collateral agreement, bilaterally with collateral agreement or through a central counterparty. Our goal is to define rules for determining the most efficient way of trading. We take into account credit value adjustment, funding costs and capital costs related to regulatory requirements. In our empirical research, we focus on interest rate swaps with different maturities, specifically we analyse the impact of own and counterparty credit spreads on the overall costs. The results show higher efficiency of central clearing for investors with high creditworthiness. The costs of central clearing are very sensitive with respect to own credit spread and, therefore, the final decision depends on the actual relation with counterparty spread.

Recent findings have shown that the Prague Exchange featured a very active and developed stock options market right until its pre-war closure in September 1938. This paper follows up on extensive research into fragmentary archival resources, aggregating a unique collection of options quotations on the shares of Škoda, the dominant industrial firm and stock in Czechoslovakia. A rigorous review of contemporary literature has been complemented with an empirical analysis including implied volatility measurements, resulting in a detailed appraisal of the market. Even though statistical option-valuation models have already been available and generally known, these were not used by practitioners. Instead, a heuristic approach based on perfect familiarity with intrinsic valuation and hedging as well as time-value drivers, effectively used since the 19th century, has resulted in surprisingly efficient pricing, constrained - rather than by information assymmetries - primarily by transaction costs and, over a relatively brief period in 1932-33, by crisis-related liquidity issues in the market.

In general, there exist many ways to detect the fair value of financial derivatives. However, each of them is suitable for different purposes. For example, when the payoff function is not very simple or the underlying process is too complex, the approach of Monte Carlo simulation can be useful. Unfortunately, the plain Monte Carlo simulation needs a very high number of independent paths to get reliable results. It is the reason why an improvement of the plain approach should be applied to decrease the number of paths required in order to get reliable results. In this paper we study more closely several such approaches and examine their potential of increasing the efficiency. To be more exact, we apply the antithetic variates method and stratified sampling approaches, including their combinations in order to get the fair price of a plain vanilla call. We consider three distinct underlying processes: geometric Brownian motion, variance gamma model and normal inverse Gaussian model. We also verify the confidence interval for the option price. We did not find any improvements of examined methods for complex processes considering the definition via two or more independent random numbers. However, if the required accuracy is very high, it might be useful to apply the stratification to the distribution function of the complex process.

The Czech tax system is undergoing radical transformation. Among the many forthcoming changes, several features can be identified, which alter the structure of tax asymmetries. This paper uses an option-based model of direct taxation to examine a controversial new thin-capitalization rule, stipulating a mandatory benchmark for deductible unrelated-party loan expenses. We estimate the costs of debt under various risk-related scenarios, focusing on particular situations where the new regulation may result in distortions of business incentives and investment behaviour. We find that the measure can disproportionally increase the marginal cost of debt for companies with relatively risky business profiles. In particular, if the law were followed strictly, it could create effective barriers to further growth under perfectly realistic combinations of leverage and business risk. Another asymmetry arises due to a small-business exemption which can make new investment prohibitive when its cap is being reached. The model also suggests that non-deductibility of interest increases credit risk and could, in the longer term, contribute to a slack in SME lending.