Presentation given by Shalom Benaim and Dherminder Kainth at various conferences, 2011.
Conventionally, derivatives pricing models have assumed that we can borrow at the risk free rate whenever we need to do so to replicate derivatives payoffs. Post-crisis, credit spreads and the differences between different funding rates have increased significantly. Conventional assumptions are now invalid, and this has a significant impact on derivatives pricing, even for so called �vanilla� products. The way that derivatives are valued and risk managed should now reflect the (possibly correlated) credit risks and funding commitments embedded in the payoff. We will explore these issues for uncollateralised derivatives, concentrating on valuation and risk management, and show how conventional pricing theory needs to be adapted.