Andrea Pallavicini, “Arbitrage-Free Pricing with Funding Costs and Collateralization”

Friday May 29  2015
9.30 – 13.00
Scuola Normale Superiore
Aula Fermi

Andrea Pallavicini
Banca IMI, Milano and Imperial College, London

Arbitrage-Free Pricing with Funding Costs and Collateralization

The financial crisis started in 2007 has shown that any pricing framework must include from the very beginning the possibility of default of any market player. As a consequence derivative valuation and risk analysis have moved from exotic derivatives managed on simple single-asset classes to simple derivatives embedding credit risk and new, or previously neglected, types of complex and interconnected non-linear effects. Derivative valuation is adjusted to include counterparty credit risk and contagion effects along with funding costs due to collateral posting, treasury policies, and regulatory constraints. A second level of complexity is produced by moving from a single trade to the whole bank portfolio. Aggregation-dependent valuation processes, and theirs operational challenges, arising from non-linearities are discussed both from a mathematical and practical point of view.

Download slides here.

All interested people are kindly invited.