A Second Look at Post Crisis Pricing of Derivatives - Part I: A Note on Money Accounts and Collateral

Hovik Tumasyan

Papers from arXiv.org

Abstract: The paper reviews origins of the approach to pricing derivatives post-crisis by following three papers that have received wide acceptance from practitioners as the theoretical foundations for it - [Piterbarg 2010], [Burgard and Kjaer 2010] and [Burgard and Kjaer 2013]. The review reveals several conceptual and technical inconsistencies with the approaches taken in these papers. In particular, a key component of the approach - prescription of cost components to a risk-free money account, generates derivative prices that are not cleared by the markets that trade the derivative and its underlying securities. It also introduces several risk-free positions (accounts) that accrue at persistently non-zero spreads with respect to each other and the risk free rate. In the case of derivatives with counterparty default risk [Burgard and Kjaer 2013] introduces an approach referred to as semi-replication, which through the choice of cost components in the money account results in derivative prices that carry arbitrage opportunities in the form of holding portfolio of counterparty's bonds versus a derivative position with it. This paper derives no-arbitrage expressions for default-risky derivative contracts with and without collateral, avoiding these inconsistencies.

Date: 2018-06, Revised 2018-12
New Economics Papers: this item is included in nep-knm
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/1806.09198 Latest version (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:arx:papers:1806.09198

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().