%0 Journal Article
%T Pricing a Collateralized Derivative Trade with a Funding Value Adjustment
%A Chadd B. Hunzinger
%A Coenraad C.A. Labuschagne
%J Journal of Risk and Financial Management
%P 17-42
%D 2015
%R 10.3390/jrfm8010017
%X The 2008 credit crisis changed the manner in which derivative trades are conducted. One of these changes is the posting of collateral in a trade to mitigate the counterparty credit risk. Another is the realization that banks are not risk-free and, as a result, cannot borrow at the risk-free rate any longer. The latter led banks to introduced the controversial adjustment to derivative prices, known as a funding value adjustment (FVA), which is interlinked with the posting of collateral. In this paper, we extend the Cox, Ross and Rubinstein (CRR) discrete-time model to include collateral and FVA. We prove that this derived model is a discrete analogue of PiterbargĄ¯s partial differential equation (PDE), which describes the price of a collateralized derivative. The fact that the two models coincide is also verified by numerical implementation of the results that we obtain.
%K collateral
%K Cox
%K Ross and Rubinstein model
%K CSA
%K FVA
%K ISDA
%K Piterbarg model
%U http://www.mdpi.com/1911-8074/8/1/17