Funding beyond discounting: collateral agreements and derivatives pricing

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Standard derivatives pricing theory (see, for example, Hull, 2006) relies on the assumption that one can borrow and lend at a unique risk-free rate. The realities of being a derivatives desk are, however, rather different these days, as historically stable relationships between bank funding rates, government rates, Libor rates, etc, have broken down.

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Funding beyond discounting: collateral agreements and derivatives pricing

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