Munich Personal RePEc Archive

Pricing Derivatives in the New Framework: OIS Discounting, CVA, DVA & FVA

García Muñoz, Luis Manuel and de Lope Contreras, Fernando and Palomar Burdeus, Juan Esteban (2015): Pricing Derivatives in the New Framework: OIS Discounting, CVA, DVA & FVA.

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Abstract

As a byproduct of the 2007-2008 credit crunch, derivatives pricing and risk management are experiencing a dramatic transformation. Assumptions that were widely accepted not long ago, like absence of counterparty credit risk and the existence of a unique risk free curve available for every derivatives hedger in the derivatives replication process, are no longer accepted. Financial institutions are changing the way in which counterparty credit risk and funding risk are managed. We find ourselves in a world with multiple discounting curves for any given currency and with different adjustments to apply to the price of financial derivatives that seem difficult to hedge. The target of this book is to make a deep review of how these effects impact the derivatives valuation theory.

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