Funding, repo and credit inclusive valuation as modified option pricing

Damiano Brigo; Cristin Buescu; Marek Rutkowski

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arXiv · 1602.05998

Funding, repo and credit inclusive valuation as modified option pricing

Damiano Brigo·Cristin Buescu·Marek Rutkowski

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Abstract

We take the holistic approach of computing an OTC claim value that incorporates credit and funding liquidity risks and their interplays, instead of forcing individual price adjustments: CVA, DVA, FVA, KVA. The resulting nonlinear mathematical problem features semilinear PDEs and FBSDEs. We show that for the benchmark vulnerable claim there is an analytical solution, and we express it in terms of the Black-Scholes formula with dividends. This allows for a detailed valuation analysis, stress testing and risk analysis via sensitivities.

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Damiano Brigo, Cristin Buescu, Marek Rutkowski. 2016-02-18. Funding, repo and credit inclusive valuation as modified option pricing. https://arxiv.org/abs/1602.05998

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