February 8th, 2012, 3:16 pm
I'm far from being an expert on this: Ancast and Piterbarg would be FAR much more efficient than me but let's give it a try. For the quant finance and the algos, I just need to ask one question:Do you use the PDE framework or MC in your current scheme ?Basically in the most complete framework (id est with credit risk and funding cost) the value of a derivative is given byV(t,C,F)=E[Payoff(t,tau^T)+g(t,tau^T,C)+phi(t,tau^T,F)]+E[1(tau<T) *D(t,tau)*theta(C,eps)]Let me explain all the termsE[Payoff(t,tau^T)] is the risk neutral value of the derivative contract (id est the classic one) E[g(t,tau^T,C)] is the expected value of the collateral margining between t and T with C being the collateral accountE[phi(t,tau^T,F)] is the expected value of the funding and investing costs between t and T with F being the cash account needed for tradingTheta(C,eps) is the on default cash flow with "eps" being the amount of losses or costs that the surviving entity would incur upon a default eventThe dynamic of C, F and eps are defined by the ISDA CSA agreement. More on the BCCFVA pricing equation later but that's the basic idea and you would have to incorporate this for Basel III requirement. @Quartz: No I'm not involved in this topic professionaly but more personnaly I can help for the maths and the algos but I'm definitively not a good developper. I'll reread the paper of Brigo carefully and try to sum up simply. His approach (Brigo one) seems to be the most promissing in my opinion more than the two curves discounting one. It's more realistic, more deal dependent and clearer. The problem is that it's harder to implement and more ressource consuming.
Last edited by
frenchX on February 7th, 2012, 11:00 pm, edited 1 time in total.