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1

Rand Merchant Bank, 1 Merchant Place, Cnr Fredman Drive & Rivonia Road, Sandton 2196, South Africa

2

Research Associate, Faculty of Economic and Financial Sciences, Department of Finance and Investment Management, University of Johannesburg, PO Box 524, Aucklandpark 2006, South Africa

3

Department of Finance and Investment Management, University of Johannesburg, PO Box 524, Aucklandpark 2006, South Africa





*

Author to whom correspondence should be addressed.



Academic Editors: Chia-Lin Chang and Michael McAleer

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. View Full-Text

Keywords: collateral; Cox, Ross and Rubinstein model; CSA; FVA; ISDA; Piterbarg model collateral; Cox, Ross and Rubinstein model; CSA; FVA; ISDA; Piterbarg model





Autor: Chadd B. Hunzinger 1,2 and Coenraad C.A. Labuschagne 3,*

Fuente: http://mdpi.com/



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