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
Open AccessArticle

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
J. Risk Financial Manag. 2015, 8(1), 17-42; https://doi.org/10.3390/jrfm8010017
Received: 16 September 2014 / Accepted: 6 January 2015 / Published: 26 January 2015
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
Show Figures

Figure 1

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

Article Access Map by Country/Region

1
Only visits after 24 November 2015 are recorded.
Back to TopTop