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The irony in the derivatives discounting

Author

Listed:
  • 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.

Suggested Citation

  • Henrard, Marc, 2007. "The irony in the derivatives discounting," MPRA Paper 3115, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:3115
    as

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    File URL: https://mpra.ub.uni-muenchen.de/3115/1/MPRA_paper_3115.pdf
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    References listed on IDEAS

    as
    1. Henrard Marc, 2005. "Eurodollar futures and options: convexity adjustment in HJM one- factor model," Finance 0503005, University Library of Munich, Germany.
    2. Marc Henrard, 2004. "Overnight Indexed Swaps and Floored Compounded Instrument in HJM One-Factor Model," Finance 0402008, University Library of Munich, Germany.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Cost of funding; coherent pricing; interest rate derivative pricing; Libor; irony;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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