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

Traditionally derivatives have been valued in isolation. The balance sheet of which a derivative position is part, was … elements of the balance sheet. Examples are the debt valuation adjustment which incorporates default risk of the bank holding … the derivative, and the funding valuation adjustment that some authors have proposed to include the cost of funding into …

adjustment to derivative prices, known as a funding value adjustment (FVA), which is interlinked with the posting of collateral … of collateral in a trade to mitigate the counterparty credit risk. Another is the realization that banks are not risk …. In this paper, we extend the Cox, Ross and Rubinstein (CRR) discrete-time model to include collateral and FVA. We prove …

This article is concerned with the arbitrage-free valuation of bilateral counterparty risk through stochastic dynamical … models when collateral is included, with possible rehypothecation. The payout of claims is modified to account for collateral … margining in agreement with International Swap and Derivatives Association (ISDA) documentation. The analysis is specialized to …

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 …

not of his own), but also with spread changes of both counterparties. We conclude that CVA and FVA (funding value …In this paper we explore the components that should be incorporated in the price of an uncolateralized derivative. We … derivative's price will reflect the replication costs from the hedger's perspective, which will not be equal to the replication …

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

We introduce an innovative theoretical framework for the valuation and replication of derivative transactions between … credit and debit valuation adjustments (CVA and DVA). Depending on how the default contingency is accounted for, we list a …, configurations where all derivative transactions are cleared through a central counterparty clearing house (CCP). We compare the …

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 …

carry very important consequences in derivative’s trading and risk management, such as, for example, basis risk … 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 …