IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/62086.html
   My bibliography  Save this paper

Pricing Derivatives in the New Framework: OIS Discounting, CVA, DVA & FVA

Author

Listed:
  • García Muñoz, Luis Manuel
  • de Lope Contreras, Fernando
  • Palomar Burdeus, Juan Esteban

Abstract

As a byproduct of the 2007-2008 credit crunch, derivatives pricing and risk management are experiencing a dramatic transformation. Assumptions that were widely accepted not long ago, like absence of counterparty credit risk and the existence of a unique risk free curve available for every derivatives hedger in the derivatives replication process, are no longer accepted. Financial institutions are changing the way in which counterparty credit risk and funding risk are managed. We find ourselves in a world with multiple discounting curves for any given currency and with different adjustments to apply to the price of financial derivatives that seem difficult to hedge. The target of this book is to make a deep review of how these effects impact the derivatives valuation theory.

Suggested Citation

  • García Muñoz, Luis Manuel & de Lope Contreras, Fernando & Palomar Burdeus, Juan Esteban, 2015. "Pricing Derivatives in the New Framework: OIS Discounting, CVA, DVA & FVA," MPRA Paper 62086, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:62086
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/62086/1/MPRA_paper_62086.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Michael Johannes & Suresh Sundaresan, 2007. "The Impact of Collateralization on Swap Rates," Journal of Finance, American Finance Association, vol. 62(1), pages 383-410, February.
    2. Patrick Hagan & Graeme West, 2006. "Interpolation Methods for Curve Construction," Applied Mathematical Finance, Taylor & Francis Journals, vol. 13(2), pages 89-129.
    3. Masaaki Fujii & Yasufumi Shimada & Akihiko Takahashi, 2009. "A Note on Construction of Multiple Swap Curves with and without Collateral," CARF F-Series CARF-F-154, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo, revised Jan 2010.
    4. Andrea Pallavicini & Daniele Perini & Damiano Brigo, 2012. "Funding, Collateral and Hedging: uncovering the mechanics and the subtleties of funding valuation adjustments," Papers 1210.3811, arXiv.org, revised Dec 2012.
    5. Damiano Brigo & Jan-Frederik Mai & Matthias Scherer, 2013. "Consistent iterated simulation of multi-variate default times: a Markovian indicators characterization," Papers 1306.0887, arXiv.org, revised May 2014.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kazuhiro Takino, 2022. "The impact of non-cash collateralization on the over-the-counter derivatives markets," Review of Derivatives Research, Springer, vol. 25(2), pages 137-171, July.
    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.
    3. Masaaki Fujii & Akihiko Takahashi, 2010. "Modeling of Interest Rate Term Structures under Collateralization and its Implications," CIRJE F-Series CIRJE-F-762, CIRJE, Faculty of Economics, University of Tokyo.
    4. Masaaki Fujii & Yasufumi Shimada & Akihiko Takahashi, 2010. "Collateral Posting and Choice of Collateral Currency - Implications for Derivative Pricing and Risk Management-," CIRJE F-Series CIRJE-F-743, CIRJE, Faculty of Economics, University of Tokyo.
    5. Leif Andersen & Darrell Duffie & Yang Song, 2017. "Funding Value Adjustments," NBER Working Papers 23680, National Bureau of Economic Research, Inc.
    6. Areski Cousin & Ibrahima Niang, 2014. "On the Range of Admissible Term-Structures," Working Papers hal-00968943, HAL.
    7. Areski Cousin & Ibrahima Niang, 2014. "On the range of admissible term-structures," Papers 1404.0340, arXiv.org.
    8. Giacomo Morelli, 2021. "Fair prices under a unified lattice approach for interest rate derivatives," Annals of Operations Research, Springer, vol. 299(1), pages 429-441, April.
    9. Masaaki Fujii & Akihiko Takahashi, 2010. "Modeling of Interest Rate Term Structures under Collateralization and its Implications," CARF F-Series CARF-F-230, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo, revised Dec 2010.
    10. José Da Fonseca & Peiming Wang, 2016. "A joint analysis of market indexes in credit default swap, volatility and stock markets," Applied Economics, Taylor & Francis Journals, vol. 48(19), pages 1767-1784, April.
    11. Jaroslav Baran & Jiří Witzany, 2014. "Konstrukce výnosových křivek v pokrizovém období [Yield Curve Construction after Crisis]," Politická ekonomie, Prague University of Economics and Business, vol. 2014(1), pages 67-99.
    12. Han, Meng & He, Yeqi & Zhang, Hu, 2013. "A Note on Discounting and Funding Value Adjustments for Derivatives," MPRA Paper 44495, University Library of Munich, Germany.
    13. Yang Chang, 2014. "A Consistent Approach to Modelling the Interest Rate Market Anomalies Post the Global Financial Crisis," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 18, July-Dece.
    14. Jan-Frederik Mai & Marc Wittlinger, 2013. "Pricing bonds with optional sinking feature using Markov Decision Processes," Papers 1305.5220, arXiv.org.
    15. Yang Chang, 2014. "A Consistent Approach to Modelling the Interest Rate Market Anomalies Post the Global Financial Crisis," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 2-2014, January-A.
    16. Tomasz R. Bielecki & Marek Rutkowski, 2013. "Valuation and hedging of OTC contracts with funding costs, collateralization and counterparty credit risk: Part 1," Papers 1306.4733, arXiv.org, revised Jun 2013.
    17. Lafuente, Juan Ángel & Petit, Nuria & Serrano, Pedro, 2019. "Pricing factors in multiple-term structures from interbank rates," Journal of International Money and Finance, Elsevier, vol. 91(C), pages 138-159.
    18. Blomvall, Jörgen & Hagenbjörk, Johan, 2022. "Reducing transaction costs for interest rate risk hedging with stochastic programming," European Journal of Operational Research, Elsevier, vol. 302(3), pages 1282-1293.
    19. 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.
    20. Guillermo Andrés Cangrejo Jiménez, 2014. "La Estructura a Plazos del Riesgo Interbancario," Documentos de Trabajo 12172, Universidad del Rosario.

    More about this item

    Keywords

    Derivatives pricing; Collateral; OIS Discounting; CVA; DVA; FVA; Counterparty Credit Risk; Funding Risk;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:62086. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.