Pricing a collateralized derivative trade with a funding value adjustment

Artikel

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

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Journal: Journal of Risk and Financial Management ; ISSN: 1911-8074 ; Volume: 8 ; Year: 2015 ; Issue: 1 ; Pages: 17-42 ; Basel: MDPI

Classification and Topics

• Classification: Wirtschaft ; Model Construction and Estimation ; Asset Pricing; Trading Volume; Bond Interest Rates ; Forecasting Models; Simulation Methods ; Financial Crises
• Subject: collateral ; Cox ; Ross and Rubinstein model ; CSA ; FVA ; ISDA ; Piterbarg model

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Hunzinger, Chadd B. ; Labuschagne, Coenraad C. A.
• Event: Veröffentlichung
• (who): MDPI
• (where): Basel
• (when): 2015

Further information

• DOI: doi:10.3390/jrfm8010017
• Handle: http://hdl.handle.net/10419/178553
• Last update: 10.03.2025, 11:45 AM CET