Pricing Derivatives in the New Framework: OIS Discounting, CVA, DVA & FVA

Luis Manuel García Muñoz, Fernando de Lope Contreras and Juan Esteban Palomar Burdeus

MPRA Paper from University Library of Munich, Germany

Abstract: As a byproduct of the 2007-2008 credit crunch, derivatives pricing and risk management are experiencing a dramatic transformation. Assumptions that were widely accepted not long ago, like absence of counterparty credit risk and the existence of a unique risk free curve available for every derivatives hedger in the derivatives replication process, are no longer accepted. Financial institutions are changing the way in which counterparty credit risk and funding risk are managed. We find ourselves in a world with multiple discounting curves for any given currency and with different adjustments to apply to the price of financial derivatives that seem difficult to hedge. The target of this book is to make a deep review of how these effects impact the derivatives valuation theory.

Keywords: Derivatives pricing; Collateral; OIS Discounting; CVA; DVA; FVA; Counterparty Credit Risk; Funding Risk (search for similar items in EconPapers)
JEL-codes: G10 G12 G13 (search for similar items in EconPapers)
Date: 2015-02-01
New Economics Papers: this item is included in nep-rmg
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