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Arbitrage-free pricing of derivatives in nonlinear market models

The research of I. Cialenco and M. Rutkowski was supported by the DVC Research Bridging Support Grant BSDEs Approach to Models with Funding Costs. Part of the research was completed while I. Cialenco and M. Rutkowski were visiting the Institute for Pure and Applied Mathematics (IPAM) at UCLA, which is funded by the National Science Foundation. We would also like to thank the anonymous referees and Stéphane Crépey for their insightful and helpful comments and suggestions, which helped us greatly to improve the final manuscript.
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  • The objective of this paper is to provide a comprehensive study of the no-arbitrage pricing of financial derivatives in the presence of funding costs, the counterparty credit risk and market frictions affecting the trading mechanism, such as collateralization and capital requirements. To achieve our goals, we extend in several respects the nonlinear pricing approach developed in (El Karoui and Quenez 1997) and (El Karoui et al. 1997), which was subsequently continued in (Bielecki and Rutkowski 2015).
    Mathematics Subject Classification: 91G40;60J28.


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