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An overview of the valuation of collateralized derivative contracts

Author

Listed:
  • Jean-Paul Laurent
  • Philippe Amzelek
  • Joe Bonnaud

Abstract

We consider the valuation of collateralized derivative contracts such as interest rate swaps or forward FX contracts. We allow for posting securities or cash in different currencies. In the latter case, we focus on using overnight index rates on the interbank market. Using time varying haircuts, we provide an intuitive way to derive the basic discounting results, keeping in line with the most standard theoretical and market views. In a number of cases associated with margining with major central counterparties, pricing rules for collateralized trades remain linear, thus the use of (multiple) discount curves. We also show how to deal with partial collateralization, involving haircuts, asymmetric CSA, counterparty risk and funding costs. We therefore intend to provide a unified view. Mathematical or legal details are not dealt with and we privilege financial insights and easy to grasp concepts and tools. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • Jean-Paul Laurent & Philippe Amzelek & Joe Bonnaud, 2014. "An overview of the valuation of collateralized derivative contracts," Review of Derivatives Research, Springer, vol. 17(3), pages 261-286, October.
    • Handle: RePEc:kap:revdev:v:17:y:2014:i:3:p:261-286
    DOI: 10.1007/s11147-014-9098-8
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    References listed on IDEAS

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    Cited by:

    1. Christian Bender & Christian Gaertner & Nikolaus Schweizer, 2016. "Pathwise Iteration for Backward SDEs," Papers 1605.07500, arXiv.org, revised Jun 2016.
    2. Yanhui Mi, 2017. "Asset pricing under general collateralization," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 4(02n03), pages 1-23, June.

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    More about this item

    Keywords

    CCP Swaps Repos; OIS Haircuts; BSDE; G01; G12; G33;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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