The Irony in the Derivatives Discounting

Wilmott Magazine, pp. 92-98, July 2007

Posted: 25 Feb 2009  

Marc P. A. Henrard

OpenGamma; University College London - Department of Mathematics

Multiple version iconThere are 2 versions of this paper

Date Written: July 1, 2007

Abstract

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

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: https://ssrn.com/abstract=1349024

Marc P. A. Henrard (Contact Author)

OpenGamma ( email )

107 Leadenhall Street - 5th floor
London, EC3A 4AF
United Kingdom

University College London - Department of Mathematics ( email )

Gower Street
London, WC1E 6BT
United Kingdom

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