Funded Replication: Fund Exchange Processand the Valuation with Different Funding-Accounts (Cross-Currency Analogy to Funding Revisited)


  • Christian P. Fries


In this note we show that the inclusion of funding costs and collateralization into the valuation of derivatives (via replication) is analogue to the modelling of cross-currency and quantoed claimes, where the role of the FX process is taken by a “fund exchange process”. Hence, classical cross-currency (alternatively risky curve models) may be used to construct rich models for (stochastic) funding. In an appendix we make two remarks motivating the use of a dedicated funding curve.