The Irony in the Derivatives Discounting

Marc P. A. Henrard


July 1, 2007

Wilmott Magazine, pp. 92-98, July 2007

A simple and fundamental question in derivatives pricing is how (contingent) cash-flows should be discounted. As cash can generally not be invested at Libor, the Libor curve is probably not the right discounting curve, even for Libor derivatives. The impact on derivative pricing of changing the discounting curve is discussed. The pricing formulas for vanilla products are revisited in the funding framework described.

Keywords: Cost of funding, coherent pricing, interest rate derivative pricing, Libor, irony

JEL Classification: G13, E43, C63

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Date posted: February 25, 2009  

Suggested Citation

Henrard, Marc P. A., The Irony in the Derivatives Discounting (July 1, 2007). Wilmott Magazine, pp. 92-98, July 2007. Available at SSRN: http://ssrn.com/abstract=1349024

Contact Information

Marc P. A. Henrard (Contact Author)
OpenGamma ( email )
185 Park Street
London, SE1 9BL
United Kingdom
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