Risk-Neutral Valuation Under Differential Funding Costs, Defaults and Collateralization
Risk-Neutral Valuation Under Differential Funding Costs, Defaults and Collateralization
We develop a unified valuation theory that incorporates credit risk (defaults), collateralization and funding costs, by expanding the replication approach to a generality that has not yet been studied previously and reaching valuation when replication is not assumed. This unifying theoretical framework clarifies the relationship between the two valuation approaches: …