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The Irony in the Derivatives Discounting

10 Pages Posted: 14 Mar 2007  

Marc P. A. Henrard

OpenGamma; University College London - Department of Mathematics

Multiple version iconThere are 2 versions of this paper

Date Written: March 2007

Abstract

A simple and fundamental question in derivatives pricing is the way (contingent) cash-flows should be discounted. As cash can not be invested at Libor the 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 (March 2007). Available at SSRN: https://ssrn.com/abstract=970509 or http://dx.doi.org/10.2139/ssrn.970509

Marc P. A. Henrard (Contact Author)

OpenGamma ( email )

Albert House
256-260 Old Street
London, EC1V 9DD
United Kingdom

University College London - Department of Mathematics ( email )

Gower Street
London, WC1E 6BT
United Kingdom

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