 The Cox, Ross and Rubinstein tree model which includes counterparty credit risk and funding costsChadd B. Hunzinger and Coenraad C.A. Labuschagne The North American Journal of Economics and Finance, 2014, vol. 29, issue C, 200-217 Abstract: The binomial asset pricing model of Cox, Ross and Rubinstein (CRR) is extensively used for the valuation of options. The CRR model is a discrete analog of the Black–Scholes–Merton (BSM) model. The 2008 credit crisis exposed the shortcomings of the oversimplified assumptions of the BSM model. Burgard and Kjaer extended the BSM model to include adjustments such as a credit value adjustment (CVA), a debit value adjustment (DVA) and a funding value adjustment (FVA). The aim of this paper is to extend the CRR model to include CVA, DVA and FVA and to prove that this extended CRR model coincides with the model that results from discretising the Burgard and Kjaer model. Our results are numerically implemented and we also show that as the number of time-steps increase in the derived tree structure model, the model converges to the model developed by Burgard and Kjaer. Keywords: Tree model; Burgard and Kjaer model; Credit risky derivative; Cox; Ross and Rubinstein model; CVA; DVA; FVA (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:29:y:2014:i:c:p:200-217 DOI: 10.1016/j.najef.2014.06.002 Access Statistics for this article The North American Journal of Economics and Finance is currently edited by Hamid Beladi More articles in The North American Journal of Economics and Finance from Elsevier |
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