Looking at the valuation of a swap when funding costs and counterparty risk are neglected (i.e., when there is a unique … risk free discounting curve), it is natural to ask "What is the discounting curve of a swap in the presence of funding … costs, counterparty risk and/or collateralization". In this note we try to give an answer to this question. The answer …

Libor and OIS rates, the explosion of Basis Swaps spreads, and the diffusion of collateral agreements and CSA …, based on multiple yield curves reflecting the different credit and liquidity risk of Libor rates with different tenors and … the overnight discounting of cash flows originated by derivative transactions under collateral with daily margination. We …

plus a 3x6 months Forward Rate Agreement (FRA), and that Libor was a good proxy of the risk free rate required as basic … building block of no-arbitrage pricing theory. Nowadays, in the modern financial world after the credit crunch, some Libors are … carry very important consequences in derivative’s trading and risk management, such as, for example, basis risk …

diffusion of collateral agreements among OTC derivatives market counterparties, and on the consequent change of paradigm for …

In the classical quantitative finance literature it is assumed that there is a risk free rate at which hedgers can …. Nevertheless, in the current market environment a high percentage of deals are collateralized due to counperparty credit risk … concerns. Depending on the collateral agreement, collateral can be in the form of cash in different currencies, but also in the …

derivative consists of three components: the price of the perfectly collateralized derivative (a.k.a. price by collateral rate … discounting), the value adjustment due to different funding spreads between the payoff currency and the collateral currency, and …

As a byproduct of the 2007-2008 credit crunch, derivatives pricing and risk management are experiencing a dramatic … transformation. Assumptions that were widely accepted not long ago, like absence of counterparty credit risk and the existence of a … unique risk free curve available for every derivatives hedger in the derivatives replication process, are no longer accepted …

posted as collateral, so that we can end up with different current accounts that accrue at different rates and their … collateral schemes are simultaneously modeled, such as a CVA pricing engine …

The standard measures of distress risk ignore the fact that firm defaults are correlated and that some defaults are … more likely to occur in bad times. We use risk premium computed from corporate credit spreads to measure a firm’s exposure … to systematic variation in default risk. Unlike previously used measures that proxy for a firm’s physical probability of …