A General Framework for the Benchmark pricing in a Fully Collateralized Market (formerly titled as "Choice of Collateral Currecy Updated" carf-f-371; Forthcoming in Journal of Financial Engineering)

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 CARF-F-378, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo

Abstract: Collateralization with daily margining has become a new standard in the post-crisis market. Although there appeared vast literature on a so-called multi-curve framework, a complete picture of a multi-currency setup with cross-currency basis can be rarely found since our initial attempts. This work gives its extension regarding a general framework of interest rates in a fully collateralized market. It gives a new formulation of the currency funding spread which is better suited for the general dependence. In the last half, it develops a discretization of the HJM framework with a fixed tenor structure, which makes it implementable as a traditional Market Model.

Pages: 27 pages
Date: 2016-02
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