We develop a unified valuation theory that incorporates credit risk (defaults), collateralization and funding costs, by expanding the replication approach to a generality that has not yet been studied previously and reaching valuation when replication is not assumed. This unifying theoretical...

In this paper we focus on a fundamental practical issue regarding the bilateral counterparty risk adjustment. The past literature assumes that, at the moment of the first default, a risk-free closeout amount will be used. The closeout amount is the net present value of the residual deal which is...

In this paper we develop structural first passage models (AT1P and SBTV) with time-varying volatility and characterized by high tractability, moving from the original work of Brigo and Tarenghi (2004, 2005) and Brigo and Morini (2006). The models can be calibrated exactly to credit spreads using...

The book's content is focused on rigorous and advanced quantitative methods for the pricing and hedging of counterparty credit and funding risk. The new general theory that is required for this methodology is developed from scratch, leading to a consistent and comprehensive framework for...

With the rapid development of the credit derivatives market, efficient pricing of default has become an extremely important issue for the credit risk management of banks and other investors. We consider here some of the opportunities and problems that the development of this market poses to...

Standard techniques for incorporating liquidity costs into the fair value of derivatives produce counter-intuitive results when credit risk of the counterparty (CVA) and of the investor (DVA) are added to the picture. Here, Massimo Morini and Andrea Prampolini show that a consistent framework...

Different anomalies have appeared in the interest rate market after the burst of the credit crunch. A wide wedge has opened between the market quotes of Forward Rate Agreements and their standard spot Libor replication, and large Basis Spreads have appeared for exchanging floating payments with...