Funded Replication: Fund Exchange Processand the Valuation with Different Funding-Accounts (Cross-Currency Analogy to Funding Revisited)
Article first published online: 11 APR 2013
Copyright © 2013 Wilmott Magazine Ltd.
Volume 2013, Issue 63, pages 36–41, January 2013
How to Cite
Fries, C. P. (2013), Funded Replication: Fund Exchange Processand the Valuation with Different Funding-Accounts (Cross-Currency Analogy to Funding Revisited). Wilmott, 2013: 36–41. doi: 10.1002/wilm.10182
- Issue published online: 11 APR 2013
- Article first published online: 11 APR 2013
- Cited By
- OIS discounting;
- replication cost
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.