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Asset pricing under general collateralization

Author

Listed:
  • Yanhui Mi

    (Bank of America Merrill Lynch, One Bryant Park, New York 10036, USA)

Abstract

We consider the valuation of collateralized derivative contracts such as bond option or Caplet contracts. We allow for posting different collaterals such as securities or cash for the derivatives and its hedges. The pricing is based on modeling the joint evolution of collateral rate and the spread between collaterals. The Hull–White models are applied to collateral rate and spread to generate the closed pricing formula for zero coupon bond option. We also derive the pricing formula for Caplet under the Libor Market model and SABR model framework.

Suggested Citation

  • 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.
    • Handle: RePEc:wsi:ijfexx:v:04:y:2017:i:02n03:n:s2424786317500190
    DOI: 10.1142/S2424786317500190
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    References listed on IDEAS

    as
    1. Jean-Paul Laurent & Philippe Amzelek & Joe Bonnaud, 2014. "An overview of the valuation of collateralized derivative contracts," Post-Print hal-03679423, HAL.
    2. 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.
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