: A new MTM is calculated, and new collateral is posted to reset the balance to zero. Collateral Choice Option (cheapest-to-deliver) also discussed in this text? Discounting in The New World Vladimir Piterbarg Barclays
The basic "recipe" (often found on the critical page 14 of industry whitepapers) defines the value of a derivative as the expectation under a specific measure that accounts for the collateral rate. In simpler terms: piterbarg cooking with collateral pdf 14
Search for: "Cooking with Collateral" Piterbarg PDF The 14-page version is from Risk magazine (December 2009). A longer 22-page version exists on SSRN (ID 1411140). : A new MTM is calculated, and new
If collateral is cash with overnight rate (OIS), then ( r_C = r_OIS ). Hence, all derivatives under a standard CSA (Credit Support Annex, with cash collateral) should be discounted using OIS curves — which became market practice post-crisis. In simpler terms: Search for: "Cooking with Collateral"
Because the mark-to-market (MTM) value is perfectly offset by the collateral posted, the net cost to terminate the contract at any time is effectively zero. Funding Invariance: