Derivative Pricing under Asymmetric and Imperfect Collateralization and CVA

Masaaki Fujii and Akihiko Takahashi
Additional contact information
Masaaki Fujii: Faculty of Economics, University of Tokyo
Akihiko Takahashi: Faculty of Economics, University of Tokyo

No CARF-F-265, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo

Abstract: The importance of collateralization through the change of funding cost is now well recognized among practitioners. In this article, we have extended the previous studies of collateralized derivative pricing to more generic situation, that is asymmetric and imperfect collateralization with the associated counter party credit risk. By introducing the collateral coverage ratio, our framework can handle these issues in an unified manner. Although the resultant pricing formula becomes non-linear FBSDE and cannot be solve exactly, the fist order approximation is provided using Gateaux derivative. We have shown that it allows us to decompose the price of generic contract into three parts: market benchmark, bilateral credit value adjustment (CVA), and the collateral cost adjustment (CCA) independent from the credit risk. We have studied each term closely, and demonstrated the significant impact of asymmetric collateralization through CCA using the numerical examples.

Pages: 38 pages
Date: 2011-12
New Economics Papers: this item is included in nep-ban
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://www.carf.e.u-tokyo.ac.jp/old/pdf/workingpaper/fseries/276.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:cf265

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 ().