FX Modelling in Collateralized Markets: foreign measures, basis curves, and pricing formulae
We present a general derivation of the arbitrage-free pricing framework for multiple-currency collateralized products. We include the impact on option pricing of the policy adopted to fund in foreign currency, so that we are able to price contracts with cash flows and/or collateral accounts expressed in foreign currencies inclusive of funding costs originating from dislocations in the FX market. Then, we apply these results to price cross-currency swaps under different market situations, to understand how to implement a feasible curve bootstrap procedure. We present the main practical problems arising from the way the market is quoting liquid instruments: uncertainties about collateral currencies and renotioning features. We discuss the theoretical requirements to implement curve bootstrapping and the approximations usually taken to practically implement the procedure. We also provide numerical examples based on real market data.
Code (0)
등록된 구현이 없습니다.
Similar Papers 제목 키워드 기반
Borrowing Constraints in Emerging Markets
Borrowing constraints are a key component of modern international macroeconomic models. The analysis of Emerging Markets (EM) economies generally assumes collateral borrowing constraints, i.e., firms access to debt is co…
Foreign Signal Radar
We introduce a new machine learning approach to detect value-relevant foreign information for both domestic and multinational companies. Candidate foreign signals include lagged returns of stock markets and individual st…
Multi Currency Credit Default Swaps Quanto effects and FX devaluation jumps
Credit Default Swaps (CDS) on a reference entity may be traded in multiple currencies, in that protection upon default may be offered either in the domestic currency where the entity resides, or in a more liquid and glob…
Gender-Segmented Labor Markets and Foreign Demand Shocks
Gender segmentation in labor markets shapes the local effects of international trade. We develop a theory that combines exports with gender-segmented labor markets and show that, in this framework, foreign demand shocks …
SegmentationImpact of Multiple Curve Dynamics in Credit Valuation Adjustments under Collateralization
We present a detailed analysis of interest rate derivatives valuation under credit risk and collateral modeling. We show how the credit and collateral extended valuation framework in Pallavicini et al (2011), and the rel…