The Pricing Methods For Forwards With Collaterals

The over the-counter (OTC) derivatives transactions have grown rapidly since1980s,the OTC derivatives have grown immensely and there are more and more kindsof OTC derivatives. Going with the rapid growth of OTC derivatives market, thecredit risk the parties of OTC derivatives have to face becomes more and moreimportant and also a hot field of research.Now researches about the credit risk of OTC derivatives mainly concentrate onpricing the credit risk. But in practice the parties usually use collaterals to transfer thecredit risk. And researches about collateral mainly concentrate on loans havingcollateral and secured bonds. There aren't many researches on derivatives withcollaterals.This paper focuses on the pricing problem of forwards with collaterals. First Imake an overview of papers about the effect of collaterals, then based on the existingstructure model, extend this model to the condition of collateral portfolio. Next basedon the JLT model, this paper originally develops a reduced pricing method forforwards with collaterals. Considering the strengths of structural method, this paperoriginally develops another pricing method for forwards with collaterals. This methodcombines the structural and reduced ideas. Further more this paper analyses the resultof pricing.