The irony in the derivatives discounting

Henrard, Marc (2007): The irony in the derivatives discounting.

Abstract

A simple and fundamental question in derivatives pricing is the way (contingent) cash-flows should be discounted. As cash can not be invested at Libor the curve is probably not the right discounting curve, even for Libor derivatives. The impact on derivative pricing of changing the discounting curve is discussed. The pricing formulas for vanilla products are revisited in the funding framework described.

• Item Type: MPRA Paper
• Institution: BIS
• Language: English
• Keywords: Cost of funding; coherent pricing; interest rate derivative pricing; Libor; irony
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Interest Rates: Determination, Term Structure, and Effects; G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing ; Futures Pricing; D - Microeconomics > D2 - Production and Organizations > D24 - Production ; Cost ; Capital ; Capital, Total Factor, and Multifactor Productivity ; Capacity

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