Abstract
In this article, we combine arbitrage pricing with expectation pricing for derivative trades that are partially collateralized through margining. We let the two parties of a trade hedge off market risk and counterparty default risks using underlying asset, credit default swaps and cash, so each of them has a portfolio consisting of the hedging instruments, margin account as well as the derivative. A direct application of the Ito’s lemma to the price dynamics of derivatives subject to counterparty default and funding risks enables us to identify CVA and FVA individually and even, for vanilla derivative contracts, analytically. Continuous-time margining is considered for equity derivatives in generality while discrete-time margining is considered for vanilla interest-rate swaps.