2012/07/10 by Damiano Brigo, Brigo, Damiano, Cristin Buescu +5
Business, Management and Accounting · Economics, Econometrics and Finance · #91B70 #91G10 #91G20 #91G40 #Banking stability, regulation, efficiency #Credit Risk and Financial Regulations #FOS: Economics and business #Financial Markets and Investment Strategies #Pricing of Securities (q-fin.PR) #Private Equity and Venture Capital #Risk Management (q-fin.RM)
paper · pdf · doi:10.48550/arxiv.1207.2316
openalex publication_date 2012/07/10 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
We illustrate a problem in the self-financing condition used in the papers "Funding beyond discounting: collateral agreements and derivatives pricing" (Risk Magazine, February 2010) and "Partial Differential Equation Representations of Derivatives with Counterparty Risk and Funding Costs" (The Journal of Credit Risk, 2011). These papers state an erroneous self-financing condition. In the first paper, this is equivalent to assuming that the equity position is self-financing on its own and without including the cash position. In the second paper, this is equivalent to assuming that a subportfolio is self-financing on its own, rather than the whole portfolio. The error in the first paper is avoided when clearly distinguishing between price processes, dividend processes and gain processes. We present an outline of the derivation that yields the correct statement of the self-financing condition, clarifying the structure of the relevant funding accounts, and show that the final result in "Funding beyond discounting" is correct, even if the self-financing condition stated is not.