Two curves, one price

Marco Bianchetti
10 Sep 2010

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The financial crisis has multiplied the yield curves used to price plain vanilla interest rate derivatives, making classic single-curve no-arbitrage relations and pricing formulas no longer valid. Marco Bianchetti shows that no-arbitrage can be recovered by taking into account the basis adjustment bootstrapped from market basis swaps, and that generalised no-arbitrage double-curve pricing formulas can be derived for vanillas by using the foreign currency analogy, including a quanto-like

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