The widely accepted view on derivatives pricing post-crisis states that - the price of a fully collateralized derivative transaction is obtained by discounting all associated cash flows with the cost of the collateral, while for a non-collateralized derivative transaction the discounting rate should be the cost of unsecured funding of the "issuing" counterparty. The paper examines origins of this view by following three papers , that have received wide acceptance from practitioners as providing the theoretical foundations for it - [Piterbarg 2010], [Burgard and Kjaer 2010] and [Burgard and Kjaer 2013]. The paper reveals several conceptual and technical inconsistencies with the approaches taken in these articles, and in general concludes that none of the statements above either follows from or is required by the ]  no-arbitrage pricing theory .
The paper reviews origins of the approach to pricing derivatives post-crisis by following three papers that have received wide acceptance from practitioners as the theoretical foundations for it - [Piterbarg 2010], [Burgard and Kjaer 2010] and [Burgard and Kjaer 2013]. The review reveals several conceptual and technical inconsistencies with the approaches taken in these papers. In particular, a key component of the approach - prescription of cost components to a risk-free money account, generates derivative prices that are not cleared by the markets that trade the derivative and its underlying securities. It also introduces several risk-free positions (accounts) that accrue at persistently non-zero spreads with respect to each other and the risk free rate. In the case of derivatives with counterparty default risk Burgard and Kjaer 2013] introduces an approach referred to as semi-replication, which through the choice of cost components in the money account results in derivative prices that carry arbitrage opportunities in the form of holding portfolio of counterparty's bonds versus a derivative position with it. This paper derives no-arbitrage expressions for default-risky derivative contracts with and without collateral, avoiding these inconsistencies .
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widely accepted view on derivatives pricing
paper reviews origins of the approach to pricing derivatives
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states that - the price of a fully collateralized derivative transaction is obtained by discounting all associated cash flows with the cost of the collateral, while for a non-collateralized derivative transaction the discounting rate should be the cost of unsecured funding of the "issuing" counterparty. The paper examines origins of this view
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,
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providing
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paper
review
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articles, and in general concludes that none of the statements above either follows from or is required by the
papers. In particular, a key component of the approach - prescription of cost components to a risk-free money account, generates derivative prices that are not cleared by the markets that trade the derivative and its underlying securities. It also introduces several risk-free positions (accounts) that accrue at persistently non-zero spreads with respect to each other and the risk free rate. In the case of derivatives with counterparty default risk
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Burgard and Kjaer 2013
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introduces an approach referred to as semi-replication, which through the choice of cost components in the money account results in derivative prices that carry arbitrage opportunities in the form of holding portfolio of counterparty's bonds versus a derivative position with it. This paper derives
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pricing theory
expressions for default-risky derivative contracts with and without collateral, avoiding these inconsistencies