Funding, Repo and Credit Inclusion in Option Pricing via Dividends

13 Pages Posted: 20 Feb 2016

See all articles by Damiano Brigo

Damiano Brigo

Imperial College London - Department of Mathematics

Cristin Buescu

King's College London, Department of Mathematics

Marek Rutkowski

The University of Sydney - School of Mathematics and Statistics

Date Written: February 18, 2016

Abstract

This paper specializes a number of earlier contributions to the theory of valuation of financial products in presence of credit risk, repurchase agreements and funding costs. Earlier works, including our own, pointed to the need of tools such as Backward Stochastic Differential Equations (BSDEs) or semi-linear Partial Differential Equations (PDEs), which in practice translate to ad-hoc numerical methods that are time-consuming and which render the full valuation and risk analysis difficult. We specialize here the valuation framework to benchmark derivatives and we show that, under a number of simplifying assumptions, the valuation paradigm can be recast as a Black-Scholes model with dividends. In turn, this allows for a detailed valuation analysis, stress testing and risk analysis via sensitivities. We refer to the full paper for a more complete mathematical treatment.

Keywords: Hedging, funding costs, counterparty risk, credit risk, re-purchase agreement, repo market, valuation adjustments, dividends

JEL Classification: G12

Suggested Citation

Brigo, Damiano and Buescu, Cristin and Rutkowski, Marek, Funding, Repo and Credit Inclusion in Option Pricing via Dividends (February 18, 2016). Available at SSRN: https://ssrn.com/abstract=2734459 or http://dx.doi.org/10.2139/ssrn.2734459

Damiano Brigo

Imperial College London - Department of Mathematics ( email )

South Kensington Campus
London SW7 2AZ, SW7 2AZ
United Kingdom

HOME PAGE: http://www.imperial.ac.uk/people/damiano.brigo

Cristin Buescu (Contact Author)

King's College London, Department of Mathematics ( email )

Strand
London, WC2R 2LS
United Kingdom

Marek Rutkowski

The University of Sydney - School of Mathematics and Statistics ( email )

Sydney, New South Wales 2006
Australia

Register to save articles to
your library

Register

Paper statistics

Downloads
147
Abstract Views
634
rank
198,602
PlumX Metrics