Curve Building and SwapPricing in the Presence of Collateral and Basis Spreads

Sammanfattning: The eruption of the financial crisis in 2008 caused immense widening of both domestic and cross currency basis spreads. Also, as a majority of all fixed income contracts are now collateralized the funding cost of a financial institution may deviate substantially from the domestic Libor. In this thesis, a framework for pricing of collateralized interest rate derivatives that accounts for the existence of non-negligible basis spreads is implemented. It is found that losses corresponding to several percent of the outstanding notional may arise as a consequence of not adapting to the new market conditions.