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The irony in the derivatives discounting

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  • Henrard, Marc

Abstract

A simple and fundamental question in derivatives pricing is the way (contingent) cash-flows should be discounted. As cash can not be invested at Libor the curve is probably not the right discounting curve, even for Libor derivatives. The impact on derivative pricing of changing the discounting curve is discussed. The pricing formulas for vanilla products are revisited in the funding framework described.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 3115.

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Date of creation: 26 Mar 2007
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Handle: RePEc:pra:mprapa:3115

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Related research

Keywords: Cost of funding; coherent pricing; interest rate derivative pricing; Libor; irony;

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References

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  1. Marc Henrard, 2004. "Overnight Indexed Swaps and Floored Compounded Instrument in HJM One-Factor Model," Finance 0402008, EconWPA.
  2. Henrard Marc, 2005. "Eurodollar futures and options: convexity adjustment in HJM one- factor model," Finance 0503005, EconWPA.
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Cited by:
  1. Eduard Gim\'enez & Alberto Elices & Giovanna Villani, 2014. "A generalized pricing and hedging framework for multi-currency fixed income desks," Papers 1406.1811, arXiv.org.
  2. Zorana Grbac & Antonis Papapantoleon & John Schoenmakers & David Skovmand, 2014. "Affine LIBOR models with multiple curves: theory, examples and calibration," Papers 1405.2450, arXiv.org, revised Jun 2014.
  3. Nicola Moreni & Andrea Pallavicini, 2010. "Parsimonious HJM Modelling for Multiple Yield-Curve Dynamics," Papers 1011.0828, arXiv.org.
  4. Bianchetti, Marco, 2008. "Two Curves, One Price :Pricing & Hedging Interest Rate Derivatives Decoupling Forwarding and Discounting Yield Curves," MPRA Paper 22022, University Library of Munich, Germany, revised 24 Jan 2010.
  5. Damiano Brigo & Andrea Pallavicini, 2014. "CCP Cleared or Bilateral CSA Trades with Initial/Variation Margins under credit, funding and wrong-way risks: A Unified Valuation Approach," Papers 1401.3994, arXiv.org.
  6. Andrea Pallavicini & Damiano Brigo, 2013. "Interest-Rate Modelling in Collateralized Markets: Multiple curves, credit-liquidity effects, CCPs," Papers 1304.1397, arXiv.org.
  7. Schmidt, Wolfgang M., 2011. "Interest rate term structure modelling," European Journal of Operational Research, Elsevier, vol. 214(1), pages 1-14, October.
  8. Damiano Brigo & Andrea Pallavicini, 2013. "CCPs, Central Clearing, CSA, Credit Collateral and Funding Costs Valuation FAQ: Re-hypothecation, CVA, Closeout, Netting, WWR, Gap-Risk, Initial and Variation Margins, Multiple Discount Curves, FVA?," Papers 1312.0128, arXiv.org, revised Dec 2013.
  9. Marco, Bianchetti & Mattia, Carlicchi, 2012. "Interest Rates After The Credit Crunch: Multiple-Curve Vanilla Derivatives and SABR," MPRA Paper 42248, University Library of Munich, Germany.

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