An Equilibrium Pricing for OTC Derivatives with Collateralization. Application of Economic Premium Principle

In this article, we propose an equilibrium pricing rule for the contingent claims by applying the economic premium principle initiated by Buhlmann (1980). The derivative markets in our model are over-the-counter (OTC) markets and have counterparty risks. We reconstruct the economic premium principle to explicitly handle the concrete form of the payoff function and the claim volume, and then we provide the equilibrium pricing rule for the OTC derivatives with the counterparty risks and the collateral agreements. We also demonstrate whether our pricing approach is consistent with an another equilibrium pricing rule in the point of the sensitivity of derivative prices