Questions tagged [collateral]
Questions related to collateral, from impact on theoretical valuations to operational aspects of collateral posting.
49 questions
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Cross-Gamma from XCCY booked on different CSAs
This question is about the cross-gamma arising from hedging trades on different CSAs.
As an example imagine the following set-up:
We are paid EUR/USD Xccy Basis against a specific counterparty on an ...
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69
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Calculating PFE of a repo trade
What is the market practice to calculate PFE (Potential Future Exposure) of a repo trade? If we model the rate using Gaussian HJM (and calibrate it using swaptions) and use that in the simulation, ...
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Why is ColVA a negative XVA adjustment?
The expression for ColVA is usually written as something similar to this:
$ColVA= -\int_{t}^{T} D(t,u) E_{t}\Big[ s_{X}(u)X(u)\Big]du$
Where D is the discount, $s_{x}$ the spread at which the ...
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Cheapest-to-Deliver (CTD) collateral methodology
Do you know where can I find details about this methodology? Theoretically, in cases where the CSA allows collateral to be posted in different currencies, the counterparty will always choose the ...
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Collateral rate vs. funding rate vs. repo rate in derivatives pricing post-GFC
I am reading Funding Beyond Discounting: Collateral Agreements and Derivatives Pricing by V. Piterbarg.
Now I have a question about the relation of the different funding rates in the paper.
$r_C$ is ...
- 101
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1
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151
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future cashflow loan equivalence
I'm trying to improve my understanding of valuation under collateralisation.
One point that is made within multiple sources is for an uncollateralised derivative, how a future cashflow is equivalent ...
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1
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142
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posting US treasury as collateral
lets say party A and party B are the two parties in a derivative contract.
If party B posts USD cash as collateral, it would expect party A to return the collateral with interest at settlement. How ...
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How to apply a funded equity collar to illiquid stocks?
I investigate a specific case of the funded equity collar [1].
Let's assume that counterparty $A$ already has a stake in share $XYZ$ and wants to get funding out of it from a bank $B$, which does not ...
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Tax obligation in collaterised loan
Typically physical assets e.g. gold are held as collateral for corporate loan. In case of default, the holder of the corporate loan (i.e. bank) can liquidate the collateral asset held to recover the ...
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Synthetix' assets failure scenarios
Synthetix project provides the system where different assets like USD, BTC, stocks are emulated by minting tokens representing them (sUSD, sBTC) collateralised by SNX token. Prices are defined via ...
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Price Adjustment Interest (PAI) for collateral Bond
I understand that, if cash is put as collateral, the party holding the collateral needs to pay the counter party the funding cost of the cash collateral (PAI).
How about if bonds are put as collateral?...
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What is the definition of "cheapest collateral"?
Optimizing collateral is a hot topic in the financial industry. I came across the term cheapest collateral. What does it actually mean in the context of collateral optimization, please ?
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Why do we theoretically have to take cross currency basis volatility into account when constructing Cheapest To Deliver (CTD) discount curves?
Let's take a collateralized USD IRS where there is optionality in collateral currency. My understanding is that it is standard practice to compute forward XXX/USD OIS basis curves for all currencies ...
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227
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Collateral on Derivative Position
Let say a bank enters an Interest rate swap with a counter-party, and this trade is collateralised.
I have heard about a specific term in such collateral agreement, wherein it states that the interest ...
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Cheapest-to-deliver (CTD) discount curve II
This is a follow up question on this thread
I have come across the following relationship in a CTD curve bootstrapping routine:
$$\frac{DF_{XXX}^{CSA.EUR}}{DF_{EUR}^{CSA.EUR}} = \frac{DF_{XXX}^{CSA....
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2
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Uncollateralised trades in Libor transition
Consider an OTC derivative traded with no CSA agreement, i.e. the trade is uncollateralised. My understanding is that a Libor swap curve is used in this case to discount the cashflows for this ...
- 585
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0
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Switching from EONIA to ESTR for CSA discounting
In practice, when bilateral counterparties switch from OIS to ESTR discounting, the party which sees a fall in the fair value of the CSA contract gets compensated for the decrease by the other party (...
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Collateral Management - Initial Margin Frequency
My understanding is that initial margin presents over collateralization and comes into play in an actual default scenario as it aims to cover closeout costs.
I was wondering what is the frequency of ...
2
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1
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212
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Operational aspects of repo funding trades
It is widely known that repurchase agreements ("repos") are regularly used by market participants as a mean to fund long/short positions in a certain asset, in particular for derivative ...
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Has a closed-form formula for the collateral choice option been found?
The collateral choice option problem has been formulated in e.g. Fujii and Takahashi (2011), Piterbarg (2012) or Antonov and Piterbarg (2013), as the computation of an expectation of the following ...
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Optimising PnL on an interest rate swap
I recently just got asked the below question. Please help.
"You are about to execute a zero fixed rate vs. Float rate swap under daily cash margining with a client in a normal swap rate curve ...
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2
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359
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How does the Collateral in Collateralized Loan Obligations (CLOs) Work?
I am trying to understand, in its simplest form, how the collateralized loan obligations (CLO) work.
I refer to an article in The Atlantic for those who are interested in learning about CLOs.
The way ...
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Understanding CSA and novation
I had an example at work which I didn't have full intuition of. The example is as follows:
You have novated a forward starting cross-currency basis swap (let's say 10y10y EUR ccbs).
The PV is ...
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0
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Equity finance and primary brokerage and their products
I was in the project working on the asset classes known as EF/PB, which is short for Equity Fiance / Primary brokerage, I understand that Equity finance is more or less about securities lending, and ...
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What is the difference between a cleared interest rate swap and a OTC interest rate swap with collateral in theory
I understand the aspect that central clearing reduced counterparty risks. From the valuation side, am I right that cash flows for both trades will be discounted at the OIS rate?
The party that holds ...
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Possible to have different collateral for each party?
Normally bilateral credit support annexes would have both parties post/receive the same collateral be it US treasuries or cash etc. Are there CSAs
Where each party has a different set of eligible ...
2
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0
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65
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Pricing bond backed by collateral
I'm new to quantitative finance, and trying to derive an interest rate for a collateralized bond.
Imagine there are two parties, Alice and Bob. Alice wants to lend $X$ units of an asset to Bob. The ...
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What is a quick way to estimate the haircut on a collateral that is actively traded
If I have an traded asset like a bond with face value of 1 million, but currently trading at 0.9 million, can I simply say that the haircut, if I use this asset as a collateral for repo, is 1 - 0.9=0....
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Quantitative impact of Dodd-Frank Act on risk management
The US Dodd-Frank Act (DFA) introduced mandatory central clearing of standard (e.g. plain vanilla) swaps for big financial institutions in the US in 2013.
It might be a broad question but: what have ...
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Collateralized / uncollateralized swap
Is a fully collateralized interest rate swap considered free of counterparty credit risk? Or close to risk free? Therefore discounted by the rate that best proxies the risk-free rate (which is the OIS-...
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Cheapest-to-deliver (CTD) discount curve
Can someone explain, in layman's terms, the mechanics (the algorithm steps) of the construction of the discount curve in the case when the CSA allows the posting party to choose a currency (from a ...
- 258
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3
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Funded equity collars and margin loans
There is an article in the Financial Times today concerning equity funded collars [1]. The equity collar structure is used by a counterparty $A$ which wants to build up a position in a stock $S_t$. ...
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Valuing a cross currency basis swap using a third currency as a collateral
Suppose India and South Africa goes into a cross currency basis swap. But the collateral is specified upon USD. How does one value this type of swaps? Or is it even available directly on the markets?
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How to estimate quantitatively the settlement period?
The context of this question is Counterparty Credit Risk. In particular, the modelling of collateral for non-cleared OTC derivatives.
Regulators require collateral amounts, such as Variation Margin ...
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1
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108
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Cash as Collateral in OTC Market
In OTC market Collateral Posting as cash is normal, so when it is said
Collateral Posted as USD CASH
Does that mean Actual amount of currency is posted electronically (or any security is posted) ...
- 301
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Collateralized Interest Rate Swap
I am struggeling with the wording "Collateralized" IRS and try to get an understanding out of it based on an example. Especially what it means that in the multi curve models the expectations are ...
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Risk-neutral measure(s) under collateralization and funding costs
In Piterbarg (2010) the author presents a modified Black-Scholes model with an economy with a CSA-collateral (OIS) rate $r_C(t)$, a repo rate $r_R(t)$ and considers a derivative $V(t)$ written on a ...
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Collateral replication argument
I'm trying to follow the replication argument in the first page of the following paper
http://www.math.columbia.edu/~fts/Collateralized%20trade%20pricing%20made%20simple%20v1a.pdf
One can however ...
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Which volatility to use in cap pricing with CSA discounting?
I'm currently trying to price a cap on a Libor 3M (US) collateralized in EUR. I understand that my discount curve should be the CSA and the price of a caplet should be using a Black-scholes price:
$$...
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633
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What Is the correct discounting, risky or riskless?
Suppose I can sell a European put in two ways: 1) in a mark to market collateralized market with collateral rate equal to the riskless rate $r$; 2) in a noncollaterized market where I get the payment ...
- 2,876
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1
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950
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Risk-neutral expectation equation with collateral and funding costs
I am looking at a paper by V. Piterbarg, Funding beyond discounting: collateral agreements and derivatives pricing, that you can download on the following link, in which the author adapts the Black-...
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short selling with collateral accounting
I don't know how the accounting works for short selling with collateral:
For example if a stock is \$10 a share and turn out to be $15 a share a week later.
At time 0, you borrow and sell 10 shares ...
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CSA discounting vs OIS discounting
In the fixed income literature, is the CSA discounting the same as OIS discounting? Seems they're referring to the same thing, but couldn't find an explicit statement confirming it.
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One Way CSA Agreements
This is probably an older topic but I don't seem to find any related threads on this forum.
What is the best way to value, let's say, a vanilla IR swap (you receive fixed) that you trade against a ...
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How does rehypothecation cause systemic risk?
I've read in many places that rehypothecation causes systemic risk (not to be confused with systematic risk), but none offer an explanation. Is this because of the daisy-chain effect that would happen ...
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Why is CSA currency OIS rate used in discounting instead of local currency OIS?
I have been struggling to understand the logic behind cross currency OIS discounting (where cash flows happen in different currencies than the collateral is paid). I will illustrate my question ...
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368
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Do taking in account the CSA create convexity effects in your stripping?
When you strip your rate curves using CSA, what kind of convexity effects might appear as a result when computing the CSAed curve from one fixing to another ?
For example if you are valuing an USD ...
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761
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Pricing with collateral
I have been confused about many things concerning the princing of securities with collateral.
We can prove that today's price of a security( fully collateralized and within the same currency) is the ...
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Rationale for OIS discounting for collateralized derivatives?
Can someone explain to me the rationale for why the market may be moving towards OIS discounting for fully collateralized derivatives?
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