Choice of Collateral Currency Updated--A market model for the benchmark pricing--

Masaaki Fujii and Akihiko Takahashi
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Masaaki Fujii: Faculty of Economics, The University of Tokyo
Akihiko Takahashi: Faculty of Economics, The University of Tokyo

No CIRJE-F-988, CIRJE F-Series from CIRJE, Faculty of Economics, University of Tokyo

Abstract: Collateralization with daily margining and the so-called OIS-discounting have become a new standard in the post-crisis financial market. Although there appeared a large amount of literature to deal with a so-called multi-curve framework, a complete picture for a multi-currency setup with currency funding spreads, which are necessary to explain non-zero cross currency basis, can be rarely found since our initial attempts [9, 10, 11]. This note gives an extension of these works regarding a general framework of interest rates for a fully collateralized market. We provide a new formulation of the currency funding spread which is more suitable in the presence of non-zero correlation to the collateral rates. In particular, the last half of the paper is dedicated to develop a discretization of the HJM framework including stochastic collateral rates, LIBORs, foreign exchange rates as well as currency funding spreads with a fixed tenor structure, which makes it readily implementable as a traditional Market Model of interest rates.

Pages: 26 pages
Date: 2015-08
New Economics Papers: this item is included in nep-mon
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