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...

We propose a numerical procedure for the pricing of financial contracts whose contingent claims are exposed to two sources of risk: the stock price and the short interest rate. More precisely, in our pricing framework we assume that the stock price dynamics is described by the Cox, Ross...

The price of financial derivative with unilateral counterparty credit risk can be expressed as the price of an otherwise risk-free derivative minus a credit value adjustment(CVA) component that can be seen as shorting a call option, which is exercised upon default of counterparty, on MtM of the...

The price of financial derivative with unilateral counterparty credit risk can be expressed as the price of an otherwise risk-free derivative minus a credit value adjustment(CVA) component that can be seen as shorting a call option, which is exercised upon default of counterparty, on MtM of the...

We revisit the problem of pricing and hedging plain vanilla single-currency interest rate derivatives using multiple distinct yield curves for market coherent estimation of discount factors and forward rates with dierent underlying rate tenors. Within such double-curve-single-currency framework,...

Markov chain theory is proving to be a powerful approach to bootstrap highly nonlinear time series. In this work we provide a method to estimate the memory of a Markov chain (i.e. its order) and to identify its relevant states. In particular the choice of memory lags and the aggregation of...

In this notice we are comment popular approaches to the credit risk modeling.

In [10] we presented a reduced form of risky bond pricing. At the default date a bond seller fail to continue fulfill his obligation and the price of the bond sharply drops down. If the face value of the defaulted bond for no-default scenarios is $1 then the bond price just after default is...

We analyze the liquidity component in a derivative transaction where both counterparties can default, and the effect of a counterparty's default probability on his funding costs and benefits. The analysis shows that the value of a transaction is influenced not by the total cost of funding of a...

Current CVA modeling framework has ignored the impact of stochastic recovery rate. Due to the possible negative correlation between default and recovery rate, stochastic recovery rate could have a doubling effect on wrong-way risk. In the case of a payer CDS, when counterparty defaults, the CDS...