Research

Choice of Collateral Currency Updated -A market model for the benchmark pricing-

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Abstract

Collateralization with daily margining and the so-called OIS-discounting have become a new standard in the post-crisis financial market. Although there appeared a large amount of literature to deal with a so-called multi-curve framework, a complete picture for a multi-currency setup with currency funding spreads, which are necessary to explain non-zero cross currency basis, can be rarely found since our initial attempts [9, 10, 11]. This note gives an extension of these works regarding a general framework of interest rates for a fully collateralized market. We provide a new formulation of the currency funding spread which is more suitable in the presence of non-zero correlation to the collateral rates. In particular, the last half of the paper is dedicated to develop a discretization of the HJM framework including stochastic collateral rates, LIBORs, foreign exchange rates as well as currency funding spreads with a fixed tenor structure, which makes it readily implementable as a traditional Market Model of interest rates.
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