Before this paper, traders used OIS (Overnight Index Swap) rates as risk-free. Piterbarg proved that the correct discount rate depends on .
Piterbarg often summarizes the collateral lifecycle in five steps: : Party A pays the asset amount to Party B. piterbarg cooking with collateral pdf 14
Before Piterbarg, the standard assumption was to discount all derivatives by a single risk-free rate (e.g., OIS, overnight indexed swap rate). But after the 2008 financial crisis, the collapse of the Libor-OIS spread and the proliferation of collateral agreements (CSAs) made it clear that: Before this paper, traders used OIS (Overnight Index
For a with collateral rate ( r_C ): [ V(t) = \mathbbE^C \left[ e^-\int_t^T r_C(u) du \cdot \textPayoff \right] ] Where ( \mathbbE^C ) is expectation under the measure where the collateral asset is numéraire. Before Piterbarg, the standard assumption was to discount
Even today, with SOFR, €STR, and SONIA replacing Libor, Piterbarg’s framework is still the gold standard: