Asset pricing under general collateralization

Yanhui Mi ()
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Yanhui Mi: Bank of America Merrill Lynch, One Bryant Park, New York 10036, USA

International Journal of Financial Engineering (IJFE), 2017, vol. 04, issue 02n03, 1-23

Abstract: We consider the valuation of collateralized derivative contracts such as bond option or Caplet contracts. We allow for posting different collaterals such as securities or cash for the derivatives and its hedges. The pricing is based on modeling the joint evolution of collateral rate and the spread between collaterals. The Hull–White models are applied to collateral rate and spread to generate the closed pricing formula for zero coupon bond option. We also derive the pricing formula for Caplet under the Libor Market model and SABR model framework.

Keywords: Collateral management; repos; OIS; CSA; change of measure; bond option; Caplet/Cap; Hull–White model; Libor Market model (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1142/S2424786317500190

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