Funding, repo and credit inclusive valuation as modified option pricing

D. Brigo, C. Buescu, M. Rutkowski

Research output: Contribution to journalArticlepeer-review

8 Citations (Scopus)
179 Downloads (Pure)

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 languageEnglish
Pages (from-to)665-670
JournalOPERATIONS RESEARCH LETTERS
Volume45
Issue number6
Early online date25 Oct 2017
DOIs
Publication statusPublished - Nov 2017

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