In this article, we consider replication pricing of derivatives that are partially collateralized by cash. We let the issuer replicate the derivatives payout using shares and cash, and let the buyer replicate the the loss given the counterparty default using credit default swaps. The costs of...

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Purpose – The purpose of this paper is to provide a framework of replication pricing of derivatives and identify funding valuation adjustment (FVA) and credit valuation adjustments (CVA) as price components. Design/methodology/approach – The authors propose the notion of bilateral...

Convertible bonds and American warrants commonly contain the provision of the callable feature which allows the issuer to buy back the derivative at a predetermined recall price. Upon recall, by virtue of the early exercise privilege embedded in an American style derivative, the holder may...

In this paper we study a correlation-based LIBOR market model with a square-root volatility process. This model captures downward volatility skews through taking negative correlations between forward rates and the multiplier. An approximate pricing formula is developed for swaptions, and the...

This paper is concerned with option pricing in an incomplete market driven by a jump-diffusion process. We price options according to the principle of utility indifference. Our main contribution is an efficient multi-nomial tree method for computing the utility indifference prices for both...

In derivatives pricing, funding costs and counterparty credit risks are intimately related and should be treated consistently. Working under the framework of arbitrage pricing, Lixin Wu shows a proper way to formulate and evaluate the adjustments to the risk-free valuation of a derivative for...