CCP discounting big bang: convexity adjustment
The collateral transition to SOFR will create convexity adjustments that need to be modelled
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Central counterparties are planning big bang-like collateral transitions. The transitions are done in an illiquid market and some fair market values are unknown. The CCP-selected mechanism to deal with these unknowns gives rise to exotic convexity adjustments. In this paper, Marc Henrard analyses the origin of those adjustments and quantifies the resulting impact based on a model for the dynamics of the relevant discounting and forwarding rates
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