Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/178553
Authors: 
Hunzinger, Chadd B.
Labuschagne, Coenraad C. A.
Year of Publication: 
2015
Citation: 
[Journal:] Journal of Risk and Financial Management [ISSN:] 1911-8074 [Volume:] 8 [Year:] 2015 [Issue:] 1 [Pages:] 17-42
Abstract: 
The 2008 credit crisis changed the manner in which derivative trades are conducted. One of these changes is the posting of collateral in a trade to mitigate the counterparty credit risk. Another is the realization that banks are not risk-free and, as a result, cannot borrow at the risk-free rate any longer. The latter led banks to introduced the controversial adjustment to derivative prices, known as a funding value adjustment (FVA), which is interlinked with the posting of collateral. In this paper, we extend the Cox, Ross and Rubinstein (CRR) discrete-time model to include collateral and FVA. We prove that this derived model is a discrete analogue of Piterbarg's partial differential equation (PDE), which describes the price of a collateralized derivative. The fact that the two models coincide is also verified by numerical implementation of the results that we obtain. Full article
Subjects: 
collateral
Cox
Ross and Rubinstein model
CSA
FVA
ISDA
Piterbarg model
JEL: 
C51
G12
C53
G01
Persistent Identifier of the first edition: 
Creative Commons License: 
https://creativecommons.org/licenses/by/4.0/
Document Type: 
Article

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