Discussion Papers 2016

CIRJE-F-1000

"A General Framework for the Benchmark pricing in a Fully Collateralized Market"

Author Name

Fujii, Masaaki and Akihiko Takahashi

Date

February 2016

Full Paper

PDF File

Remarks

International Journal of Financial Engineering (2016), 3 (3),1650019(30), formerly titled as "choice of collateral currency updated" (CIRJE-F-988 (2015)).

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.

Keywords: swap, collateral, derivatives, Libor, currency, OIS, basis, HJM, CSA