This paper examines the valuation of a partially guaranteed derivative in a given foreign currency that is traded in its credit support annex between default counterparties. Two pricing approaches — through coverage and waiting — are presented to obtain the same valuation formulas. Our results show that the current reference value of such a derivative consists of three components: the price of the perfectly guaranteed derivative (also known as collateral-discount prices), depreciation due to different financing differences between the payment currency and the collateral currency and the depreciation related to the financing needs of unsecured risk. These results generalize previous work on the discounting of fully guaranteed derivatives and the depreciation of partially guaranteed or unsecured derivatives. Masaaki Fujii, Yasufumi Shimada and Akihiko Takahashi. Collateral posting and choice of security currency – impact on derivatives pricing and risk management. SSRN, 2010. Available on SSRN: ssrn. com/abstract-1601866. Damiano Brigo, Cristin Buescu, Andrea Pallavicini and Qing Liu. The illustration of a problem in the self-financing condition in two 2010-11 documents on financing, guarantees and discounting. SSRN, 2012.

Available at SSRN: ssrn.com/abstract=2103121. Masaaki Fujii and Akihiko Takahashi. The choice of security currency. Risk, pages 120-125, January 2011. The standard theory of derivatives prices (see z.B Hull, 2006) is based on the assumption that one can borrow and lend at a single risk-free interest rate. However, the realities of being a derivative window today are somewhat different, as historically stable relationships are broken down between bank financing rates, government interest rates, Libor rates, etc. [11] Christoph Burgard and Mats Kjaer. Partial differential equations of counterparty risk derivatives and financing costs. Journal of Credit Risk, 7(3):75-93, 2011. [12] Andrea Pallavicini, Daniele Perini and Damiano Brigo. Adaptation of the evaluation of funding: a single framework with cva, dva, guarantees, compensation rules and re-mortgage. SSRN, 2011.

Available on SSRN: ssrn.com/abstract=1969114. [2] Vladimir V. Piterbarg. Financing beyond discount: collateral agreements and derivative prices. Risk, pages 97-102, February 2011. I look at a document from V. Piterbarg, Funding beyond discounting: Collateral Agreements and Derivatives Pricing, which you can download from the following link, in which the author adapts the Black-Scholes price grid to introduce guarantees and financing at a risk-free interest rate. [7] Vladimir V. Piterbarg.

Cooking with guarantees. Risk, pages 58-63, August 2012. [1] Michael Johannes and Suresh Sundaresan. The effect of protection on swap rates. Journal of Finance, 62 (1): 383-410, 2007. Masaaki Fujii, Yasufumi Shimada and Akihiko Takahashi. An indication on the construction of several swap curves with or without warranty. FSA Research Review, 6:139-157, March 2010. [14] John C. Hull and Alan White. Libor vs.

ois: The dilemma of reducing derivatives. SSRN, 2012. Available from SSRN: ssrn.com/abstract=2211800. financing beyond the discount: warranty contracts and derivative prices [9] Leon F.