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Abstract
An economy without a risk-free rate has been considered in the past but traditional derivatives pricing theory assumed the existence of such a rate as a matter of course. Until the crisis, this assumption worked well, but now even government bonds cannot be considered credit risk-free. Hence, using a risk-free money-market account or a zero-coupon bond as a foundation for asset pricing theory needs revisiting. While some of the standard constructions in asset pricing theory could be reinterpreted in a way consistent with the developments of this article, there is significant value in going through the steps of derivations to show how they should be adapted to the prevailing market practice. This is the programme the authors carry out here. They have developed a framework for asset pricing in an economy where there is no risk-free rate and all transactions are collateralised. It turns out that much of the machinery of standard risk-neutral pricing theory can be reused, with a few changes.