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Title: Pricing contingent claims on credit and carbon single and multiple underlying assets
Author: Labre, Marcelo
ISNI:       0000 0004 2689 5770
Awarding Body: Imperial College London
Current Institution: Imperial College London
Date of Award: 2010
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This thesis proposes alternative ways to price contingent claims written on portfolios of credit instruments as well as on carbon underlying assets. On the first topic of this research we tackle the pricing of Collateralized Debt Obligations (CDOs) by introducing two different approaches through the application of respectively Johnson SB distributions and entropy optimization principles, in contrast to market standard pricing approaches based on variations of the Gaussian copula model. The relevance of this topic is in line with the events that unfolded during the “credit crunch” of mid-2007 to early 2009, when CDOs made headlines as being responsible for more than $542 billion in losses through writedowns by financial institutions. On the second topic we propose a pricing methodology for Emission Reduction Purchase Agreement (ERPA) contracts. These are instruments based on carbon as an asset class and created by the emergence of an international carbon market that followed the adoption of the Kyoto Protocol (KP) to the United Nations Framework Convention on Climate Change (UNFCCC) in December 1997. ERPAs are of vital importance to the function of KP’s market mechanisms and the carbon markets at large as they formalize transactions of emissions reduction offsets between sellers and buyers, more specifically transactions involving Certified Emission Reductions (CERs). We propose a pricing methodology based on stochastic modeling of CER volume delivery risk and carbon prices as the two main drivers underlying ERPAs, and apply it to a case study on a run-of-river hydro power CDM project activity in China.
Supervisor: Atkinson, Colin Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral