The financial crisis has multiplied the yield curves used to price plain vanilla interest rate derivatives, making classic single-curve no-arbitrage relations and pricing formulas no longer valid. Marco Bianchetti shows that no-arbitrage can be recovered by taking into account the basis adjustment bootstrapped from market basis swaps, and that generalised no-arbitrage double-curve pricing formulas can be derived for vanillas by using the foreign currency analogy, including a quanto-like adjustment typical of cross-currency derivatives. Both the basis and the quanto adjustments find a simple financial interpretation in terms of counterparty risk.

Marco Bianchetti (2010). Two Curves, One Price. RISK, 8, 74-80.

Two Curves, One Price

Marco Bianchetti
Primo
2010

Abstract

The financial crisis has multiplied the yield curves used to price plain vanilla interest rate derivatives, making classic single-curve no-arbitrage relations and pricing formulas no longer valid. Marco Bianchetti shows that no-arbitrage can be recovered by taking into account the basis adjustment bootstrapped from market basis swaps, and that generalised no-arbitrage double-curve pricing formulas can be derived for vanillas by using the foreign currency analogy, including a quanto-like adjustment typical of cross-currency derivatives. Both the basis and the quanto adjustments find a simple financial interpretation in terms of counterparty risk.
2010
Marco Bianchetti (2010). Two Curves, One Price. RISK, 8, 74-80.
Marco Bianchetti
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11585/841516
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