Imperial College London
Alternate

ProfessorDamianoBrigo

Faculty of Natural Sciences, Department of Mathematics

Chair in Mathematical Finance
 
 
 
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Contact

 

damiano.brigo CV

 
 
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Location

 

805Weeks BuildingSouth Kensington Campus

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Summary

 

Publications

Citation

BibTex format

@article{Brigo:2022:10.3390/math10050791,
author = {Brigo, D and Buescu, C and Francischello, M and Pallavicini, A and Rutkowski, M},
doi = {10.3390/math10050791},
journal = {Mathematics},
title = {Nonlinear valuation with XVAs: two converging approaches},
url = {http://dx.doi.org/10.3390/math10050791},
volume = {10},
year = {2022}
}
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RIS format (EndNote, RefMan)

TY  - JOUR
AB  - When pricing OTC contracts in the presence of additional risk factors and costs, such as credit risk and funding and collateral costs, the starting “clean price” is modified additively by valuation adjustments (XVAs) that account for each factor or cost in isolation, while seemingly ignoring the combined effects. Instead, risk factors and costs can be jointly accounted for ab initio in the pricing mechanism at the level of cash flows, and this “adjusted cash flow" approach leads to a nonlinear valuation formula. While for practitioners this made more sense because it showed which discount factor is used for which cash flow (recall the multi-curve environment post-crisis), for academics, the focus was on checking that the resulting nonlinear valuation formula is consistent with the theoretical arbitrage-free “replication approach” that we also analyse in the paper. We formulate specific reasonable assumptions, which ensure that the valuation formulae obtained by the two approaches coincide, thus reinforcing both academics’ and practitioners’ confidence in adopting such nonlinear valuation formulae in a multi-curve setup.
AU  - Brigo,D
AU  - Buescu,C
AU  - Francischello,M
AU  - Pallavicini,A
AU  - Rutkowski,M
DO  - 10.3390/math10050791
PY  - 2022///
SN  - 2227-7390
TI  - Nonlinear valuation with XVAs: two converging approaches
T2  - Mathematics
UR  - http://dx.doi.org/10.3390/math10050791
UR  - https://www.mdpi.com/2227-7390/10/5/791
UR  - http://hdl.handle.net/10044/1/95964
VL  - 10
ER  -
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