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Primer: Curve Stripping with Full Collateralisation

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  • Alan Brace

    (National Australia Bank)

Abstract

In the past five years, it has become clear that there is no longer such a thing as a single "risk-free" interest rate term structure for each currency in the market, and proper pricing of cash ows must take into account basis spreads and collateralisation. An aspect of this issue is considered in this paper: Working in a cross-economy HJM type framework, the Fujii Shimada Takahashi (FST) theorem, specifying the present value of a fully collateralised derivative, is applied to stripping cross-currency swaps. The guiding principle in our approach is that it be based on an underlying arbitrage free interest rate model, in which values of Libors and FX forwards remain invariant under reasonable choices of collateral.

Suggested Citation

  • Alan Brace, 2013. "Primer: Curve Stripping with Full Collateralisation," Research Paper Series 330, Quantitative Finance Research Centre, University of Technology, Sydney.
    • Handle: RePEc:uts:rpaper:330
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    File URL: https://www.uts.edu.au/sites/default/files/qfr-archive-03/QFR-rp330.pdf
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    References listed on IDEAS

    as
    1. Andrea Pallavicini & Daniele Perini & Damiano Brigo, 2011. "Funding Valuation Adjustment: a consistent framework including CVA, DVA, collateral,netting rules and re-hypothecation," Papers 1112.1521, arXiv.org, revised Dec 2011.
    2. 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.
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