A Second Look at Post Crisis Pricing of Derivatives - Part I: A Note on Money Accounts and Collateral
A Second Look at Post Crisis Pricing of Derivatives - Part I: A Note on Money Accounts and Collateral
We examine the theoretical principles that underlie pricing of OTC derivatives in the aftermath of the 2007-2009 Financial Crisis widely accepted by practitioners. We conjecture that no-arbitrage pricing does not give rise to cost-related XVA terms (e.g., FVA, MVA, KVA), contrary to the expositions in XVA literature. We derive funding …