Modeling of Interest Rate Term Structures under Collateralization and its Implications

Masaaki Fujii and Akihiko Takahashi
Additional contact information
Masaaki Fujii: The University of Tokyo
Akihiko Takahashi: The University of Tokyo

No CARF-F-230, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo

Abstract: In recent years, we have observed dramatic increase of collateralization as an important credit risk mitigation tool in over the counter (OTC) market [6]. Combined with the significant and persistent widening of various basis spreads, such as Libor-OIS and cross currency basis, the practitioners have started to notice the importance of difference between the funding cost of contracts and Libors of the relevant currencies. In this article, we integrate the series of our recent works [1, 2, 4] and explain the consistent construction of term structures of interest rates in the presence of collateralization and all the relevant basis spreads, their no-arbitrage dynamics as well as their implications for derivative pricing and risk management. Particularly, we have shown the importance of the choice of collateral currency and embedded "cheapestto-deliver" (CTD) option in a collateral agreement.

Pages: 20 pages
Date: 2010-09, Revised 2010-12
New Economics Papers: this item is included in nep-ban, nep-mon and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
https://www.carf.e.u-tokyo.ac.jp/old/pdf/workingpaper/fseries/240.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cfi:fseres:cf230

Access Statistics for this paper

More papers in CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo Contact information at EDIRC.
Bibliographic data for series maintained by ().