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Writings

PDF: Forward LIBOR projection and collateral currency independence assumption

In the market there is a convention to project forward LIBOR without considering the collateral currency in that situation. This paper discusses that it is equivalent to assuming that the forward libor is uncorrelated to a certain term that comes from the spread of a spread. First posted April 2013

PDF: OIS curves and FX directed graphs

To show that getting the discount factor for flows in a currency collateralized in possibly another currency is equivalent to the question of getting the FX rates with a given set of FX rates via multiplication, division etc. First posted Dec 2012

PDF: Collateralized Pricing Made Simple

To understand pricing formulas on simple flows with different collateral currencies given by the use of various discount curves. The treatment is from first principal and the intention is to provide elementary treatment reaching a large audience. First posted July 2012

PDF: Which Rate to use

For a desk selling stock options, when using the standard Black-Scholes (BS) framework for pricing, what kind of interest rate / funding rate should be used? There is only one variable in most BS formulas that represents interest rates. The answer is that one should use the stock repo rate, and then, either invoke an extra multiplicative factor (depending on the collateralization ratio) to adjust the option value, or equivalently, use an quanto-like adjusted dividend rate for pricing. The CVA deduced is rough linear in the collateralization ratio. First posted March 2011