Pricing a Collateralized Derivative Trade with a Funding Value Adjustment
| Autor: | Chadd B. Hunzinger, Coenraad C.A. Labuschagne |
|---|---|
| Jazyk: | angličtina |
| Rok vydání: | 2015 |
| Předmět: |
Collateral
Financial economics ISDA collateral lcsh:Risk in industry. Risk management jel:E jel:C CSA jel:G Cox Ross and Rubinstein model FVA Piterbarg model C51 Derivative (finance) lcsh:Finance lcsh:HG1-9999 Econometrics Economics ddc:330 G12 C53 Partial differential equation Collateralized debt obligation Ross and Rubinstein model Cox lcsh:HD61 jel:F2 Value (economics) jel:F3 Credit crunch G01 Realization (probability) Credit risk |
| Zdroj: | Journal of Risk and Financial Management, Vol 8, Iss 1, Pp 17-42 (2015) Journal of Risk and Financial Management Volume 8 Issue 1 Pages 17-42 |
| ISSN: | 1911-8074 |
| Popis: | The 2008 credit crisis changed the manner in which derivative trades are conducted. One of these changes is the posting of collateral in a trade to mitigate the counterparty credit risk. Another is the realization that banks are not risk-free and, as a result, cannot borrow at the risk-free rate any longer. The latter led banks to introduced the controversial adjustment to derivative prices, known as a funding value adjustment (FVA), which is interlinked with the posting of collateral. In this paper, we extend the Cox, Ross and Rubinstein (CRR) discrete-time model to include collateral and FVA. We prove that this derived model is a discrete analogue of Piterbarg's partial differential equation (PDE), which describes the price of a collateralized derivative. The fact that the two models coincide is also verified by numerical implementation of the results that we obtain. Full article |
| Databáze: | OpenAIRE |
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