Collateral option valuation made easy

Vladimir Sankovich and Qinghua Zhu develop a method to value cheapest-to-deliver option embedded in CSAs

It is by now well known that the terms of collateral posting between counterparties influence prices of derivatives contracts. These terms are typically documented in Credit SupportAnnexes(CSAs). Some CSAs allow the posting party to choose a currency (from a pre-agreed-upon set) in which collateral will be delivered.We refer to this optionality as the cheapest-to-deliver (CTD) funding option. The presence of this option may significantly alter the profile of the appropriate funding curve and