Fast calculation of cheapest-to-deliver curves

Alexander Kemarsky, Wouter Van Der Helm and Vladimir Piterbarg

Journal of Computational Finance

Abstract: Trades subject to a collateral agreement that allows cash in multiple currencies need to be discounted with the so-called cheapest-to-deliver curve, which embeds the optionality inherent in the choice of collateral currencies. These curves can be computed essentially exactly via a Monte Carlo simulation, but analytical approximations allow for faster calculation. We revisit this long-standing problem and propose an approximation that improves on the existing methods in terms of speed, accuracy and extendibility to any number of currencies.

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