Instruct: Identify the main and secondary category of Arxiv papers based on the titles and abstracts
Query: Two Curves, One Price: Pricing & Hedging Interest Rate Derivatives
  Decoupling Forwarding and Discounting Yield Curves   We revisit the problem of pricing and hedging plain vanilla single-currency
interest rate derivatives using multiple distinct yield curves for market
coherent estimation of discount factors and forward rates with different
underlying rate tenors.
  Within such double-curve-single-currency framework, adopted by the market
after the credit-crunch crisis started in summer 2007, standard single-curve
no-arbitrage relations are no longer valid, and can be recovered by taking
properly into account the forward basis bootstrapped from market basis swaps.
Numerical results show that the resulting forward basis curves may display a
richer micro-term structure that may induce appreciable effects on the price of
interest rate instruments.
  By recurring to the foreign-currency analogy we also derive generalised
no-arbitrage double-curve market-like formulas for basic plain vanilla interest
rate derivatives, FRAs, swaps, caps/floors and swaptions in particular. These
expressions include a quanto adjustment typical of cross-currency derivatives,
naturally originated by the change between the numeraires associated to the two
yield curves, that carries on a volatility and correlation dependence.
Numerical scenarios confirm that such correction can be non negligible, thus
making unadjusted double-curve prices, in principle, not arbitrage free.
  Both the forward basis and the quanto adjustment find a natural financial
explanation in terms of counterparty risk.

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The categories of this paper are: hep-ph
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The categories of this paper are: econ
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The categories of this paper are: chem-ph
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The categories of this paper are: q-alg
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The categories of this paper are: math-ph
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The categories of this paper are: nucl-th
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The categories of this paper are: alg-geom
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The categories of this paper are: funct-an
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The categories of this paper are: solv-int
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The categories of this paper are: ao-sci
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The categories of this paper are: hep-th
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The categories of this paper are: hep-ex
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The categories of this paper are: gr-qc
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The categories of this paper are: plasm-ph
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The categories of this paper are: cond-mat
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The categories of this paper are: atom-ph