Funding, repo and credit inclusive valuation as modified option pricing

D. Brigo; C. Buescu; M. Rutkowski

doi:10.1016/j.orl.2017.10.009

Funding, repo and credit inclusive valuation as modified option pricing

D. Brigo, C. Buescu, M. Rutkowski

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Abstract

We take the holistic approach of computing an OTC claim value that incorporates credit and funding liquidity risks and their interplays, instead of forcing individual price adjustments: CVA, DVA, FVA, KVA. The resulting nonlinear mathematical problem features semilinear PDEs and FBSDEs. We show that for the benchmark vulnerable claim there is an analytical solution, and we express it in terms of the Black-Scholes formula with dividends. This allows for a detailed valuation analysis, stress testing and risk analysis via sensitivities.

Original language	English
Pages (from-to)	665-670
Journal	OPERATIONS RESEARCH LETTERS
Volume	45
Issue number	6
Early online date	25 Oct 2017
DOIs	https://doi.org/10.1016/j.orl.2017.10.009
Publication status	Published - Nov 2017

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10.1016/j.orl.2017.10.009Licence: CC BY

Funding, repo and credit_BRIGO_Publishedonline25October2017_GOLD VoR (CC BY)Final published version, 600 KBLicence: CC BY

https://arxiv.org/abs/1602.05998

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AB - We take the holistic approach of computing an OTC claim value that incorporates credit and funding liquidity risks and their interplays, instead of forcing individual price adjustments: CVA, DVA, FVA, KVA. The resulting nonlinear mathematical problem features semilinear PDEs and FBSDEs. We show that for the benchmark vulnerable claim there is an analytical solution, and we express it in terms of the Black-Scholes formula with dividends. This allows for a detailed valuation analysis, stress testing and risk analysis via sensitivities.

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Funding, repo and credit inclusive valuation as modified option pricing

Abstract

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