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A Risk Collateral Management Cutting Edge feature, by Alexandre Antonov and Vladimir Piterbarg

Credit support annexes specify rules for posting collateral. If multiple currencies are allowed, then the party posting collateral has a choice of which currency to post, now and at each future point in time. This choice leads to optionality that needs to be accounted for when valuing even the most basic of derivatives, such as forwards or swaps.
 
Numerical efficiency for valuing this optionality is key and first-order approximations have been proposed previously. In this paper, for the case of two currencies, Drs. Alexandre Antonov andVladimir Piterbarg propose more accurate schemes that are still very efficient.

About the Authors:

Dr. Alexandre Antonov received his Ph.D. degree from the Landau Institute for Theoretical Physics in 1997 and joined Numerix in 1998, where he currently works as a Senior Vice President of Quantitative Research. His activity is concentrated on modeling and numerical methods for interest rates, cross currency, hybrid, credit and CVA.

Dr. Vladimir Piterbarg is a Managing Director and the Head of Quantitative Analytics at Barclays Capital in London. Before joining Barclays Capital in March 2005, he was a co-head of quantitative research for Bank of America, where he had worked for 8 years. Vladimir Piterbarg’s main areas of expertise are the modeling of exotic interest rate and hybrid derivatives. Dr. Piterbarg holds a Ph.D. in Mathematics (Stochastic Calculus) from University of Southern California.

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