Study on collateral currency impact in differential swaps valuation.
problem Impact of collateral currency on differential swap valuation and risk management.
method Replication using futures, explicit pricing and hedging strategies.
result Choice of collateral currency can introduce additional risk exposures.
Study multi-currency markets with multiple interest rates and collateral.
problem Characterize absence of arbitrage in a multi-currency market.
method Generalize results from Bielecki and Rutkowski (2015) to a multi-currency framework, linking with Piterbarg (2012), Moreni and Pallavicini (2017), and Fujii et al. (2010b). Characterize absence of arbitrage without collateral, then study collateralization schemes under various conventions.
result Complete study of absence of arbitrage and pricing in multi-currency markets with multiple interest rates and collateral.
Abstract framework for cross-currency interest rate contracts.
problem Handling cross-currency markets with collateral and incompleteness.
method Developed a general HJM framework for abstract market indices.
result Enabled simultaneous description of multiple currency interest rate products.
This study updates a model for Mexican interest rate swaps post-crisis.
problem Post-crisis divergence of interest rates and new regulatory requirements.
method Used Fujii et al. 2010b model with collateral currencies USD, EUR, MXN.
result Validated model for Mexican interest rate derivatives with collateral currencies.
We present a general derivation of the arbitrage-free pricing framework for multiple-currency collateralized products. We include the impact on option pricing of the policy adopted to fund in foreign currency, so that we are able to price contracts with cash flows and/or collateral accounts expressed in foreign currenc…
Collateralization with daily margining has become a new standard in the post-crisis market. Although there appeared vast literature on a so-called multi-curve framework, a complete picture of a multi-currency setup with cross-currency basis can be rarely found since our initial attempts. This work gives its extension r…
Develops a new model for collateral choice options under stochastic rates.
problem Challenges in quantifying the value of collateral choice options under stochastic rates.
method Develops a scalable and stable stochastic model of collateral spreads under conditional independence, using a common factor approximation.
result Second order model yields accurate results for the value of the collateral choice option.
This study examines the collateral choice option and its valuation and hedging.
problem Non-zero collateral basis spreads impact asset valuation and require complex modeling.
method Develops a stochastic valuation model for the collateral choice option and proposes hedging strategies.
result The stochastic model attributes risks to all involved collateral currencies, unlike the deterministic model.
Paper examines pricing and hedging for cross-currency swaps referencing backward-looking rates.
problem Pricing and hedging cross-currency swaps with backward-looking rates.
method Uses interest rate and currency futures for hedging, analyzes arbitrage-free multi-curve setting.
result Explicit pricing and hedging results for CCBS with backward-looking rates.
Debt-financed collateral in DeFi increases stability risks.
problem Financial stability risks in DeFi ecosystems due to debt-financed collateral.
method Categorization and classification algorithm to measure debt-financed collateral.
result Wide-spread use of stablecoins as debt-financed collateral increases financial stability risks.
In the forthcoming ISDA Standard Credit Support Annex (SCSA), the trades denominated in non-G5 currencies as well as those include multiple currencies are expected to be allocated to the USD silo, where the contracts are collateralized by USD cash, or a different currency with an appropriate interest rate overlay to ac…
It is well known that traded foreign exchange forwards and cross currency swaps (CCS) cannot be priced applying overnight cash and carry arguments as they imply absence of funding advantage of one currency to the other. This paper proposes a heuristic present value concept for multi-currency pricing and hedging which a…
Hybrid LLM and quantum optimization improve CSA collateral management by 9-10%.
problem Finance-native collateral optimization under ISDA CSAs with legal constraints.
method Hybrid pipeline combining LLM, quantum-inspired exploration, and CP-SAT.
result Improves a strong classical baseline by 9.1-10.7% across different scenarios.
Survey of stablecoins to reduce cryptocurrency volatility.
problem Reduction of cryptocurrency volatility during financial crises.
method Classification of stablecoin approaches and assessment of tradeoffs.
result Different stablecoin types offer varying tradeoffs and challenges.
Our study proposes a new currency system to protect wealth from over-issued fiat and stablecoins.
problem The over-issuance of fiat and stablecoins undermines the stability of currency purchasing power.
method We introduce a parallel monetary system based on redeemable self-decaying money (RSDM) to provide a stable currency alternative.
result A parallel monetary system including RSDM, domestic fiat, and major reserve currencies can safeguard wealth and prevent the reverse Gresham law.
Maker Protocol manages Dai stable coin on Ethereum blockchain.
problem Managing decentralized finance applications on blockchain.
method Analyzes Maker Protocol's components and governance.
result Maker Protocol is a significant decentralized finance application.
Study how network structure affects collateral dynamics in banking systems.
problem Effects of network structure on collateral volume and hoarding in banking systems.
method Simple model of bank interactions via repo contracts and rehypothecation.
result Network structures with concentrated collateral flows are more exposed to large hoarding cascades.
The paper develops a new discount rate for derivatives using imperfect securities as collateral.
problem Inconsistent and non-observable collateral rates in derivatives markets.
method Synthesizes effects of imperfect collateral into a new discount rate, employs break-even repo formulae, and uses linear programming for optimization.
result Liquidity value adjustment (LVA) can be significant for long-term derivatives portfolios.
New model prices collateralized financial derivatives considering bankruptcy laws.
problem Inaccurate pricing of collateralized financial derivatives due to neglecting collateral and credit risk.
method Developed a new model that incorporates both collateral posting and credit risk.
result Proper accounting for collateralization is crucial for accurate pricing of financial derivatives.
The importance of collateralization through the change of funding cost is now well recognized among practitioners. In this article, we have extended the previous studies of collateralized derivative pricing to more generic situation, that is asymmetric and imperfect collateralization with the associated counter party c…
Examines SOFR derivatives pricing and hedging post-LIBOR discontinuation.
problem Pricing and hedging of SOFR derivatives post-LIBOR discontinuation.
method One-factor model based on Vasicek's equation for overnight interest rates dynamics.
result Arbitrage-free pricing and hedging of SOFR derivatives instruments.
New model values CDS contracts considering multiple credit risks and collateralization.
problem Valuation of CDS contracts affected by multiple credit risks and collateralization.
method Developed a new model to value CDS contracts, considering default dependency and collateralization.
result Default dependency significantly impacts asset pricing and full collateralization does not eliminate counterparty risk.
Develops a haircut model for non-cash collateral.
problem Addressing the need for accurate non-cash collateral valuation in shadow banking and OTC derivatives markets.
method Expands haircut definitions, uses a double-exponential jump-diffusion model, and solves for credit risk measurements.
result Computational results show potential for collateral agreements and regulatory capital calculations.
Changes in collateralization have been implicated in significant default (or near-default) events during the financial crisis, most notably with AIG. We have developed a framework for quantifying this effect based on moving between Merton-type and Black-Cox-type structural default models. Our framework leads to a singl…
This research introduces a control system for managing DeFi money supply.
problem Maintaining the value of issued currency in decentralized finance.
method Introduces a time-weighted Proportional-Integral-Derivative (PID) control system.
result Protects the value of issued currency by adapting to market activities.
Extends pricing theory for collateralized derivatives to include jumps and dividends.
problem Pricing collateralized derivatives with jumps and dividends.
method Extends No-Arbitrage theory to semimartingales, deriving pricing, dynamics, and forward prices.
result Derives pricing, dynamics, and forward prices of collateralized derivatives.
This paper generalizes the framework for arbitrage-free valuation of bilateral counterparty risk to the case where collateral is included, with possible re-hypotecation. We analyze how the payout of claims is modified when collateral margining is included in agreement with current ISDA documentation. We then specialize…
The paper tackles dynamic collateral control for spot-perpetual basis trading in decentralized finance.
problem Dynamic control of collateral in spot-perpetual basis trading in decentralized finance.
method Solves a static control problem and derives an asymmetric dynamic extension, validated with live execution.
result The dynamic control approach provides a more robust operating benchmark and shows significant rebalancing effects.
Model explains deleveraging risks in non-custodial stablecoins.
problem Deleveraging risks in non-custodial stablecoins during market crises.
method Developed a stochastic model incorporating speculators' profit optimization and collateral liquidation costs.
result Identified deflationary deleveraging spirals and higher price variance in unstable domains.
Model shows multiple currencies can coexist in large systems.
problem Competition between currencies leads to fractionalized states.
method Simplified model of currency competition with transaction costs.
result Large systems maintain two distinct currency communities.
The paper develops a new formula for financial pricing under multiple interest rates and collateralization.
problem Financial pricing under multiple interest rates and collateralization.
method Derives a change of measure formula for recursive conditional expectations in a jump-diffusion setting.
result Generalizes the change of numéraire technique for multiple interest rates and collateralization.
This paper optimizes multi-currency AMMs to reduce forex trading costs.
problem Lack of direct liquid markets for currency pairs.
method Constant-mean AMM architecture, hierarchical agglomerative clustering algorithm.
result Optimized multi-currency pools reduce trading costs by ~13%.
Paper offers a fast method to assess DeFi liquidation risk.
problem Assessing liquidation risk in DeFi stablecoin lending.
method Modeling collateral exchange rate as zero-drift geometric Brownian motion.
result Derives an exact formula for liquidation probability.
A framework for fair derivative contract pricing and risk-sharing between parties with funding differences.
problem Price asymmetry due to funding differences in bilateral contracts.
method Defines a negotiation problem that maximizes the sum of utilities for two parties, deriving optimal prices and collateral.
result Optimal negotiation price and collateral can be used to interpret margin requirements.
By analyzing the foreign exchange market data of various currencies, we derive a hierarchical taxonomy of currencies constructing minimal-spanning trees. Clustered structure of the currencies and the key currency in each cluster are found. The clusters match nicely with the geographical regions of corresponding countri…
A quantum framework optimizes collateral allocation for derivatives.
problem Legal constraints and operational rules in collateral allocation for derivatives.
method Certified higher-order quantum framework that normalizes margin requirements and builds a bounded neighborhood of actions.
result Quantum framework improves certified sample quality compared to classical methods.
Bitcoins have emerged as a possible competitor to usual currencies, but other crypto-currencies have likewise appeared as competitors to the Bitcoin currency. The expanding market of crypto-currencies now involves capital equivalent to 1010 US Dollars, providing academia with an unusual opportunity to study the em…
The market practice of extrapolating different term structures from different instruments lacks a rigorous justification in terms of cash flows structure and market observables. In this paper, we integrate our previous consistent theory for pricing under credit, collateral and funding risks into term structure modellin…
Brazil proposes a new BRICS trade currency to dominate international trade.
problem Dominance of BRICS currency in international trade.
method Mathematical model of influence battle between three currencies, using trade flows and weights in global trade.
result By 2012, about 58% of countries preferred trading with the BRICS currency.
We present a detailed analysis of interest rate derivatives valuation under credit risk and collateral modeling. We show how the credit and collateral extended valuation framework in Pallavicini et al (2011), and the related collateralized valuation measure, can be helpful in defining the key market rates underlying th…
New PFL method addresses counterparty risk challenges.
problem Challenges with PFE for counterparty limits.
method Introducing PFL combining ES and LGD, and variants aPFL and paPFL.
result PFL and variants provide a better measure of counterparty risk.
This paper studies a valuation framework for financial contracts subject to reference and counterparty default risks with collateralization requirement. We propose a fixed point approach to analyze the mark-to-market contract value with counterparty risk provision, and show that it is a unique bounded and continuous fi…
Study examines risk of digital currencies using GARCH and Filtered Historical Simulation.
problem Risk management of digital currencies like Bitcoin, Ethereum, Litecoin, and Ripple.
method GARCH modelling followed by Filtered Historical Simulation.
result Digital currencies are subject to higher risk, requiring higher buffer and risk capital.
The paper examines dynamic reserving for multiple currencies under coherent risk measures.
problem Dynamic reserving for risk in multiple currencies under a general coherent risk measure.
method Shows time-consistency of reserving portfolios in multiple currencies when a generalized m-stability condition holds, equivalent to dynamic trading across baskets of currencies with proportional transaction costs.
result A version of the Fundamental Theorem of Asset Pricing holds in this context, proving time-consistency of reserving portfolios.
Modeling bank portfolio risk under climate transition impacts.
problem Evaluating risk measures for a bank's collateralized loans in a climate transition economy.
method Developed an end-to-end modeling framework using stochastic processes and dynamic macroeconomic variables.
result Derived expressions for risk measures as functions of climate transition parameters.
Study confirms eurozone interbank market stability but finds higher collateral reuse.
problem Analyzing eurozone interbank market behavior and stability.
method Examined secured transactions data from ECB, tested stylized facts, measured network properties.
result Observed higher collateral reuse and network symmetry compared to unsecured markets.
World currency network constitutes one of the most complex structures that is associated with the contemporary civilization. On a way towards quantifying its characteristics we study the cross correlations in changes of the daily foreign exchange rates within the basket of 60 currencies in the period December 1998 -- M…
We analyze structure of the world foreign currency exchange (FX) market viewed as a network of interacting currencies. We analyze daily time series of FX data for a set of 63 currencies, including gold, silver and platinum. We group together all the exchange rates with a common base currency and study each group separa…