Sensitivities and Hedging of the Collateral Choice Option

@article{Deelstra2022SensitivitiesAH,
  title={Sensitivities and Hedging of the Collateral Choice Option},
  author={Griselda Deelstra and Lech A. Grzelak and Felix L. Wolf},
  journal={International Journal of Theoretical and Applied Finance},
  year={2022}
}
The collateral choice option allows a collateral-posting party the opportunity to change the type of security in which the collateral is deposited. Due to non-zero collateral basis spreads, this optionality significantly impacts asset valuation. Because of the complexity of valuing the option, many practitioners resort to deterministic assumptions on the collateral rates. In this article, we focus on a valuation model of the collateral choice option based on stochastic dynamics. Intrinsic di… 

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