Collateral and Credit Issues in Derivatives Pricing

by John Hull of University of Toronto, and
Alan White of University of Toronto

January 2013

Abstract: Regulatory changes are increasing the importance of collateral agreements and credit issues in over-the-counter derivatives transactions. This paper considers the nature of derivatives collateral agreements and examines the impact of collateral agreements, two-sided credit risk, funding costs, and bid-offer spreads on the valuation of derivatives portfolios.

JEL Classification: G21, G23.

AMS Classification: 91G40, 91B28.

Keywords: Derivatives Valuation, Collateral, Credit Risk, CVA, DVA, FVA.

Previously titled: CVA, DVA, FVA and the Black-Scholes-Merton Arguments

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