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

Authors

  • Christian P. Fries


Abstract

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.

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