Synthetic forwards and cost of funding in the equity derivative market
This study introduces a new technique to recover the implicit discount factor in the derivative market using only European put and call prices: this discount is grounded in actual transactions in active markets. Moreover, this study identifies the implied cost of funding, over OIS, of major market players. Does a liquid equity market allow arbitrage? The key idea is that the (unique) forward contract -- built using the put-call parity relation -- contains information about the market discount factor: by no-arbitrage conditions we identify the implicit interest rate such that the forward contract value does not depend on the strike. The procedure is applied to options on S&P 500 and EURO STOXX 50 indices. There is statistical evidence that, in the EURO STOXX 50 market, the implicit interest rate curve coincides with the EUR OIS one, while, in the S&P 500 market, a cost of funding of, on average, 34 basis points is added on top of the USD OIS curve.
Code (0)
등록된 구현이 없습니다.
Similar Papers 제목 키워드 기반
Analytical valuation of vulnerable derivative claims with bilateral cash flows under credit, funding and wrong-way risk
We study the problem of valuing and hedging a vulnerable derivative claim with bilateral cash flows between two counterparties in the presence of asymmetric funding costs, defaults and wrong way risk (WWR). We characteri…
MVA Transfer Pricing
This article prices OTC derivatives with either an exogenously determined initial margin profile or endogenously approximated initial margin. In the former case, margin valuation adjustment (MVA) is defined as the liabil…
Binary Funding Impacts in Derivative Valuation
We discuss the binary nature of funding impact in derivative valuation. Under some conditions, funding is either a cost or a benefit, i.e., one of the lending/borrowing rates does not play a role in pricing derivatives. …
Funding Adjustments in Equity Linear Products
Valuation adjustments are nowadays a common practice to include credit and liquidity effects in option pricing. Funding costs arising from collateral procedures, hedging strategies and taxes are added to option prices to…
Crowdfunding as Entrepreneurial Investment: The Role of Local Knowledge Spillover
This paper explores the role of local knowledge spillover and human capital as a driver of crowdfunding investment. The role of territory has already been studied in terms of campaign success, but the impact of territory…