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Choice of Collateral Currency Updated--A market model for the benchmark pricing--

Author

Listed:
  • Masaaki Fujii

    (Faculty of Economics, The University of Tokyo)

  • Akihiko Takahashi

    (Faculty of Economics, The University of Tokyo)

Abstract
Collateralization with daily margining and the so-called OIS-discounting have become a new standard in the post-crisis financial market. Although there appeared a large amount of literature to deal with a so-called multi-curve framework, a complete picture for a multi-currency setup with currency funding spreads, which are necessary to explain non-zero cross currency basis, can be rarely found since our initial attempts [9, 10, 11]. This note gives an extension of these works regarding a general framework of interest rates for a fully collateralized market. We provide a new formulation of the currency funding spread which is more suitable in the presence of non-zero correlation to the collateral rates. In particular, the last half of the paper is dedicated to develop a discretization of the HJM framework including stochastic collateral rates, LIBORs, foreign exchange rates as well as currency funding spreads with a fixed tenor structure, which makes it readily implementable as a traditional Market Model of interest rates.

Suggested Citation

  • Masaaki Fujii & Akihiko Takahashi, 2015. "Choice of Collateral Currency Updated--A market model for the benchmark pricing--," CIRJE F-Series CIRJE-F-988, CIRJE, Faculty of Economics, University of Tokyo.
    • Handle: RePEc:tky:fseres:2015cf988
    as

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    File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2015/2015cf988.pdf
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    References listed on IDEAS

    as
    1. Erik Schlögl, 2002. "A multicurrency extension of the lognormal interest rate Market Models," Finance and Stochastics, Springer, vol. 6(2), pages 173-196.
    2. Masaaki Fujii & Yasufumi Shimada & Akihiko Takahashi, 2009. "A Market Model of Interest Rates with Dynamic Basis Spreads in the presence of Collateral and Multiple Currencies," CARF F-Series CARF-F-196, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo, revised Apr 2011.
    3. Masaaki Fujii & Akihiko Takahashi, 2010. "Choice of Collateral Currency," CARF F-Series CARF-F-239, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    4. Masaaki Fujii & Yasufumi Shimada & Akihiko Takahashi, 2009. "A Note on Construction of Multiple Swap Curves with and without Collateral," CARF F-Series CARF-F-154, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo, revised Jan 2010.
    5. Alan Brace & Dariusz G¸atarek & Marek Musiela, 1997. "The Market Model of Interest Rate Dynamics," Mathematical Finance, Wiley Blackwell, vol. 7(2), pages 127-155, April.
    6. Filipović, Damir & Trolle, Anders B., 2013. "The term structure of interbank risk," Journal of Financial Economics, Elsevier, vol. 109(3), pages 707-733.
    7. Masaaki Fujii & Akihiko Takahashi, 2010. "Choice of Collateral Currency," CIRJE F-Series CIRJE-F-778, CIRJE, Faculty of Economics, University of Tokyo.
    Full references (including those not matched with items on IDEAS)

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