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The Irony in the Derivatives Discounting

Marc P. A. Henrard

OpenGamma; University College London - Department of Mathematics

March 2007

A simple and fundamental question in derivatives pricing is the way (contingent) cash-flows should be discounted. As cash can not be invested at Libor the 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.

Number of Pages in PDF File: 10

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

JEL Classification: G13, E43, C63

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Date posted: March 14, 2007  

Suggested Citation

Henrard, Marc P. A., The Irony in the Derivatives Discounting (March 2007). Available at SSRN: http://ssrn.com/abstract=970509 or http://dx.doi.org/10.2139/ssrn.970509

Contact Information

Marc P. A. Henrard (Contact Author)
OpenGamma ( email )
185 Park Street
London, SE1 9BL
United Kingdom
University College London - Department of Mathematics ( email )
Gower Street
London, WC1E 6BT
United Kingdom
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