Related papers: Arbitrage-Free Pricing of XVA -- Part I: Framework…
In this paper we derive an effective equation for derivative pricing which accounts for the presence of virtual arbitrage opportunities and their elimination by the market. We model the arbitrage return by a stochastic process and find an…
The strengthening of capital requirements has induced banks and traders to consider charging a so called capital valuation adjustment (KVA) to the clients in OTC transactions. This roughly corresponds to charge the clients ex-ante the…
We consider the problem of computing the Credit Value Adjustment ({CVA}) of a European option in presence of the Wrong Way Risk ({WWR}) in a default intensity setting. Namely we model the asset price evolution as solution to a linear…
This article presents FVA and CVA of a bilateral derivative in a coherent manner, based on recent developments in fair value accounting and ISDA standards. We argue that a derivative liability, after primary risk factors being hedged,…
This article presents a generic model for pricing financial derivatives subject to counterparty credit risk. Both unilateral and bilateral types of credit risks are considered. Our study shows that credit risk should be modeled as American…
In a discrete time setting, we study the central problem of giving a fair price to some financial product. For several decades, the no-arbitrage conditions and the martingale measures have played a major role for solving this problem. We…
We show how to price and replicate a variety of barrier-style claims written on the $\log$ price $X$ and quadratic variation $\langle X \rangle$ of a risky asset. Our framework assumes no arbitrage, frictionless markets and zero interest…
We propose a model for the joint evolution of European inflation, the European Central Bank official interest rate and the short-term interest rate, in a stochastic, continuous time setting. We derive the valuation equation for a contingent…
We introduce the general arbitrage-free valuation framework for counterparty risk adjustments in presence of bilateral default risk, including default of the investor. We illustrate the symmetry in the valuation and show that the adjustment…
We provide a Fundamental Theorem of Asset Pricing and a Superhedging Theorem for a model independent discrete time financial market with proportional transaction costs. We consider a probability-free version of the Robust No Arbitrage…
Decentralized exchanges using automated market makers create arbitrage opportunities with centralized exchanges, where gas fees and transaction ordering are critical. Existing models largely overlook competition among arbitrageurs, despite…
We extend the valuation of contingent claims in presence of default, collateral and funding to a random functional setting and characterise pre-default value processes by martingales. Pre-default value semimartingales can also be described…
This paper studies the pricing of contingent claims of American style, using indifference pricing by fully dynamic convex risk measures. We provide a general definition of risk-indifference prices for buyers and sellers in continuous time,…
We derive the arbitrage gains or, equivalently, Loss Versus Rebalancing (LVR) for arbitrage between \textit{two imperfectly liquid} markets, extending prior work that assumes the existence of an infinitely liquid reference market. Our…
Modelling joint dynamics of liquid vanilla options is crucial for arbitrage-free pricing of illiquid derivatives and managing risks of option trade books. This paper develops a nonparametric model for the European options book respecting…
In this paper we study partial differential equations (PDEs) that can be used to model value adjustments. Different value adjustments denoted generally as xVA are nowadays added to the risk-free financial derivative values and the PDE…
This paper studies a valuation framework for financial contracts subject to reference and counterparty default risks with collateralization requirement. We propose a fixed point approach to analyze the mark-to-market contract value with…
We use a continuous version of the standard deviation premium principle for pricing in incomplete equity markets by assuming that the investor issuing an unhedgeable derivative security requires compensation for this risk in the form of a…
We establish deterministic necessary and sufficient conditions for the no-arbitrage notions "no increasing profit" (NIP), "no strong arbitrage" (NSA) and "no unbounded profit with bounded risk" (NUPBR) in one-dimensional general diffusion…
We prove a version of First Fundamental Theorem of Asset Pricing under transaction costs for discrete-time markets with dividend-paying securities. Specifically, we show that the no-arbitrage condition under the efficient friction…