The irony in the derivatives discounting
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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- Henrard Marc, 2005. "Eurodollar futures and options: convexity adjustment in HJM one- factor model," Finance 0503005, EconWPA.
- Marc Henrard, 2004. "Overnight Indexed Swaps and Floored Compounded Instrument in HJM One-Factor Model," Finance 0402008, EconWPA.