Derivative Pricing under Asymmetric and Imperfect Collateralization and CVA
University of Tokyo - Faculty of Economics
University of Tokyo - Graduate School of Economics
December 15, 2011
The importance of collateralization through the change of funding cost is now well recognized among practitioners. In this article, we have extended the previous studies of collateralized derivative pricing to more generic situation, that is asymmetric and imperfect collateralization with the associated counter party credit risk. By introducing the collateral coverage ratio, our framework can handle these issues in an unified manner. Although the resultant pricing formula becomes non-linear FBSDE and cannot be solve exactly, the fist order approximation is provided using Gateaux derivative. We have shown that it allows us to decompose the price of generic contract into three parts: market benchmark, bilateral credit value adjustment (CVA), and the collateral cost adjustment (CCA) independent from the credit risk. We have studied each term closely, and demonstrated the significant impact of asymmetric collateralization through CCA using the numerical examples.
Number of Pages in PDF File: 34
Keywords: CSA, CVA, Swap, Collateral, Derivatives, one-way CSA, Currency, OIS, CCS, Basis, Risk Management
JEL Classification: G10, G13, G14, E40, E43, F31working papers series
Date posted: December 28, 2010 ; Last revised: December 19, 2011
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