Next Article in Journal / Special Issue
Implied and Local Volatility Surfaces for South African Index and Foreign Exchange Options
Previous Article in Journal / Special Issue
State Prices and Implementation of the Recovery Theorem
Article Menu

Export Article

Open AccessArticle
J. Risk Financial Manag. 2015, 8(1), 17-42; doi:10.3390/jrfm8010017

Pricing a Collateralized Derivative Trade with a Funding Value Adjustment

1
Rand Merchant Bank, 1 Merchant Place, Cnr Fredman Drive & Rivonia Road, Sandton 2196, South Africa
2
Research Associate, Faculty of Economic and Financial Sciences, Department of Finance and Investment Management, University of Johannesburg, PO Box 524, Aucklandpark 2006, South Africa
3
Department of Finance and Investment Management, University of Johannesburg, PO Box 524, Aucklandpark 2006, South Africa
*
Author to whom correspondence should be addressed.
Academic Editors: Chia-Lin Chang and Michael McAleer
Received: 16 September 2014 / Accepted: 6 January 2015 / Published: 26 January 2015
View Full-Text   |   Download PDF [2172 KB, uploaded 26 January 2015]   |  

Abstract

The 2008 credit crisis changed the manner in which derivative trades are conducted. One of these changes is the posting of collateral in a trade to mitigate the counterparty credit risk. Another is the realization that banks are not risk-free and, as a result, cannot borrow at the risk-free rate any longer. The latter led banks to introduced the controversial adjustment to derivative prices, known as a funding value adjustment (FVA), which is interlinked with the posting of collateral. In this paper, we extend the Cox, Ross and Rubinstein (CRR) discrete-time model to include collateral and FVA. We prove that this derived model is a discrete analogue of Piterbarg’s partial differential equation (PDE), which describes the price of a collateralized derivative. The fact that the two models coincide is also verified by numerical implementation of the results that we obtain. View Full-Text
Keywords: collateral; Cox, Ross and Rubinstein model; CSA; FVA; ISDA; Piterbarg model collateral; Cox, Ross and Rubinstein model; CSA; FVA; ISDA; Piterbarg model
Figures

Figure 1

This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. (CC BY 4.0).

Scifeed alert for new publications

Never miss any articles matching your research from any publisher
  • Get alerts for new papers matching your research
  • Find out the new papers from selected authors
  • Updated daily for 49'000+ journals and 6000+ publishers
  • Define your Scifeed now

SciFeed Share & Cite This Article

MDPI and ACS Style

Hunzinger, C.B.; Labuschagne, C.C. Pricing a Collateralized Derivative Trade with a Funding Value Adjustment. J. Risk Financial Manag. 2015, 8, 17-42.

Show more citation formats Show less citations formats

Related Articles

Article Metrics

Article Access Statistics

1

Comments

[Return to top]
J. Risk Financial Manag. EISSN 1911-8074 Published by MDPI AG, Basel, Switzerland RSS E-Mail Table of Contents Alert
Back to Top