I am a beginner in this space and did some research on how the collateral posted affects the choice of the discounting curve in derivatives transactions.
We have two scenarios based on the PV of a trade:
- PV > 0, ctpy is gaining from the transaction
receives collateral and needs to pay interest and return the amount at maturity
- PV < 0, ctpy is losing from the transaction
posts collateral and receives interest
My question is why the rate paid/received on the collateral is used to discount the future cash flow of that trade?