Keywords

Financial engineering, derivatives, over the counter derivatives, collateralization, asset pricing, derivative pricing

Abstract

Collateralization in over-the-counter (OTC) derivatives markets has grown rapidly over the past decade, and even faster in the past few years, due to the impact of the recent financial crisis and the particularly important attention to the counterparty credit risk in derivatives contracts. The addition of collateralization to such contracts significantly reduces the counterparty credit risk and allows to offset liabilities in case of default. We study the problem of valuation of OTC derivatives with payoff in a single currency and with single underlying asset for the cases of zero, partial, and perfect collateralization. We assume the derivative is traded between two default-free counterparties and analyze the impact of collateralization on the fair present value of the derivative. We establish a uniform generalized derivative pricing framework for the three cases of collateralization and show how different approaches to pricing turn out to be consistent. We then generalize the results to include multi-asset and cross-currency arguments, where the underlying and the derivative are in some domestic currency, but the collateral is posted in a foreign currency. We show that the results for the single currency, multi-asset case are consistent with those obtained for the single currency, single asset case.

Notes

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Graduation Date

2013

Semester

Summer

Advisor

Yong, Jiongmin

Degree

Master of Science (M.S.)

College

College of Sciences

Department

Mathematics

Degree Program

Mathematical Science; Industrial Mathematics

Format

application/pdf

Identifier

CFE0004855

URL

http://purl.fcla.edu/fcla/etd/CFE0004855

Language

English

Release Date

August 2013

Length of Campus-only Access

None

Access Status

Masters Thesis (Open Access)

Subjects

Dissertations, Academic -- Sciences, Sciences -- Dissertations, Academic

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Included in

Mathematics Commons

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