Collateral Volatility
28 Pages Posted: 4 May 2013 Last revised: 4 Jun 2013
Date Written: May 13, 2013
Abstract
Collateral discounting recognises the value of funding for derivatives, which has gained prominence in recent years as basis spreads have widened in response to the financial crises. This article considers the impact of collateral volatility on discount factors and Libor and FX forwards, and re-examines the core assumptions of the approach. Convenient expressions are derived for convexity adjustments and collateral options, in a form that easily integrates into curve building and pricing. Analysis of the models with reasonable volatility assumptions suggests that these pricing adjustments are not negligible.
Keywords: CSA, Collateral discounting, Collateral volatility, Convexity, Libor, OIS
JEL Classification: G12, G13
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
By Masaaki Fujii, Yasufumi Shimada, ...
-
A Note on Construction of Multiple Swap Curves with and without Collateral
By Masaaki Fujii, Yasufumi Shimada, ...
-
Derivative Pricing under Asymmetric and Imperfect Collateralization and CVA
By Masaaki Fujii and Akihiko Takahashi
-
On the Term Structure of Interest Rates with Basis Spreads, Collateral and Multiple Currencies
By Masaaki Fujii, Yasufumi Shimada, ...
-
Modeling of Interest Rate Term Structures Under Collateralization and its Implications
By Masaaki Fujii, Yasufumi Shimada, ...
-
By Masaaki Fujii, Yasufumi Shimada, ...
-
Reconciling Year on Year and Zero Coupon Inflation Swap: A Market Model Approach
By Nabyl Belgrade and Eric Benhamou
-
By Masaaki Fujii and Akihiko Takahashi
-
Collateralized CDS and Default Dependence - Implications for the Central Clearing
By Masaaki Fujii and Akihiko Takahashi