Abstract

http://ssrn.com/abstract=1601866
 
 

References (7)



 
 

Citations (3)



 


 



Collateral Posting and Choice of Collateral Currency - Implications for Derivative Pricing and Risk Management


Masaaki Fujii


University of Tokyo - Faculty of Economics

Yasufumi Shimada


Shinsei Bank, Ltd

Akihiko Takahashi


University of Tokyo - Graduate School of Economics

May 8, 2010


Abstract:     
In recent years, we have observed the dramatic increase of the use of collateral as an important credit risk mitigation tool. It has become even rare to make a contract without collateral agreement among the major financial institutions. In addition to the significant reduction of the counterparty exposure, collateralization has important implications for the pricing of derivatives through the change of effective funding cost. This paper has demonstrated the impact of collateralization on the derivative pricing by constructing the term structure of swap rates based on the actual market data.

It has also shown the importance of the ”choice” of collateral currency. Especially, when the contract allows multiple currencies as eligible collateral and free replacement among them, the paper has found that the embedded ”cheapest-to-deliver” option can be quite valuable and significantly change the fair value of a trade. The implications of these findings for market risk management have been also discussed.

Number of Pages in PDF File: 20

Keywords: swap, collateral, derivatives, Libor, currency, OIS, EONIA, Fed-Fund, CCS, basis, risk management, CSA, CVA, term structure

JEL Classification: E43, G13

working papers series





Download This Paper

Date posted: May 12, 2010  

Suggested Citation

Fujii, Masaaki and Shimada, Yasufumi and Takahashi, Akihiko, Collateral Posting and Choice of Collateral Currency - Implications for Derivative Pricing and Risk Management (May 8, 2010). Available at SSRN: http://ssrn.com/abstract=1601866 or http://dx.doi.org/10.2139/ssrn.1601866

Contact Information

Masaaki Fujii (Contact Author)
University of Tokyo - Faculty of Economics ( email )
7-3-1 Hongo, Bunkyo-ku
Tokyo 113-0033
Japan
Yasufumi Shimada
Shinsei Bank, Ltd ( email )
Chiyoda, Tokyo
Japan
Akihiko Takahashi
University of Tokyo - Graduate School of Economics ( email )
Tokyo
Japan
Feedback to SSRN


Paper statistics
Abstract Views: 3,792
Downloads: 1,182
Download Rank: 8,730
References:  7
Citations:  3

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo8 in 0.359 seconds