A CSA (Credit Support Annex) agreement specifies the interest rate to be earned on the collateral provided to back a derivatives transaction. For cash collateral this rate is generally the OIS (overnite index swap rate). A 'zero floor' refers to the provision that the i.r. rate applied may not be negative.

How to determine the value 0 floors in csa agreements in a world where negative ois rates are possible?


A couple of observations

(A) if the value of the floor, relative to a non floored CSA, is worth an amount X to one of the counterparties to the CSA, then it is worth -X to the other counterparty.

(B) The value of the floor depends on what is in the derivatives portfolio under that CSA. If, from your perspective as Counterparty A, the portfolio becomes a big receivable when ois rates are negative, then X is negative for you.

(C) the exact valuation requires a complex model that can handle the correlation between all trades that are in the portfolio, versus ois rates. If there are multiple asset classes represented in the portfolio, this could be handled by a multiasset Monte Carlo Model. Even then, calibration would not be easy. Most banks haven't developed precise technology for this.


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