Hull & White Convexity Adjustments for Credit-Riskless Interest Rate Swaps Under CSA

Hull & White Convexity Adjustments for Credit-Riskless Interest Rate Swaps Under CSA, Wilmott Magazine issue 64, Copyright © 2013, Wilmott.

15 Pages Posted: 8 Jul 2013

Date Written: January 31, 2013

Abstract

Using a multi-curve pricing framework has become standard market practice for investment banks. A new IBOR curve bootstrapping procedure is now in use consisting in discounting using an OIS curve. The curve obtained allows to recover market forwards corresponding to a CSA world which is the interbank world. Currently this curve is being used to calculate forwards for non-CSA trades, which represents an important approximation since it does not take into account the convexity adjustment implied when changing from CSA to non-CSA probability measure. By reducing counter-party risk using CSA contracts, new risk factors have arisen that are left unhandled.

We show in this paper how to calculate non-CSA forwards convexity adjustment. This adjustment depends on collateral and funding rates volatilities as well as correlation between both. We take into account these parameters under one factor gaussian short rate models, and give a detailed development for the Hull & White specifi c case. These closed formulae allow in turn fast bootstrapping procedures and therefore potential risk management for non-CSA swaps.

Keywords: CSA convexity, IRS, OIS-IBOR dynamics, Hull & White, CSA unmanaged risk

Suggested Citation

Papaioannou, Denis and Chouqi, Meriem and Giardina, Benjamin, Hull & White Convexity Adjustments for Credit-Riskless Interest Rate Swaps Under CSA (January 31, 2013). Hull & White Convexity Adjustments for Credit-Riskless Interest Rate Swaps Under CSA, Wilmott Magazine issue 64, Copyright © 2013, Wilmott. , Available at SSRN: https://ssrn.com/abstract=2284484

Denis Papaioannou (Contact Author)

Tenokonda ( email )

London
United Kingdom

HOME PAGE: http://www.tenokonda.com

Meriem Chouqi

MargoConseil ( email )

76 Route de la Demi Lune
La Défense Cedex, 92057
France

Benjamin Giardina

Natixis ( email )

47 quai d'Austerlitz
Paris, 75013
France

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