Derivatives Pricing after the 2007-2008 Crisis: How the Crisis Changed the Pricing Approach

30 Pages Posted: 19 Oct 2014 Last revised: 20 Sep 2017

Didier Youmbi

HSBC (London)

Date Written: September 19, 2017

Abstract

This paper is a summary how to price a derivative product, in the context of fear of default due to the financial crisis. We explain how zero-coupon bond curves are built; we explain how to price a collateralized deal with the possibility of two choices of collateral to post; we explain how to compute both the unilateral and the bilateral Credit Valuation Adjustment (CVA). We introduce notions of Wrong-Way Risk (WWR) and Right-Way Risk (RWR). As application we provide some simulation results on the Interest Rate Swap (IRS) contract. Computations are performed in Monte Carlo.

Keywords: CSA, collateral, CVA, credit, exposure,Wrong-Way Risk (WWR), Right-Way Risk (RWR), yield curve, DVA, FVA, zero-coupon bond, rate, hazard rate, interest rate swap, cross currency swap, collateral basis, FX swap, Libor, OIS, hull and white, CIR, lognormal

Suggested Citation

Youmbi, Didier, Derivatives Pricing after the 2007-2008 Crisis: How the Crisis Changed the Pricing Approach (September 19, 2017). Available at SSRN: https://ssrn.com/abstract=2511585 or http://dx.doi.org/10.2139/ssrn.2511585

Didier Youmbi (Contact Author)

HSBC (London) ( email )

Fourth Floor, 8 Canada Square
Canary Wharf, London, E14 5HQ
United Kingdom

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