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Quantitative Finance · Glossary

What is Collateral rate, CSA discounting?

Also known as: collateral rate · CSA discounting

Definition 2.7 Rates, Credit, XVA and Risk · Chapter 2 — Multi-Curve and Collateral Discounting

The collateral rate ctc_t of a trade is the rate the collateral taker pays on cash collateral under the trade’s collateral agreement, typically the overnight benchmark of the collateral currency. CSA discounting values each cash flow of a fully cash-collateralised trade on the curve of its collateral rate.

A cash-collateralised derivative. The bank holds collateral equal to the trade’s value and pays the collateral rate on it; its position in the trade is funded by the collateral, so its value accrues at c_t and is discounted on the curve of c_t ().
Figure 2.2. A cash-collateralised derivative. The bank holds collateral equal to the trade’s value and pays the collateral rate on it; its position in the trade is funded by the collateral, so its value accrues at ctc_t and is discounted on the curve of ctc_t (Proposition 2.8).
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