Funding Value Adjustments

Andersen, Leif; Duffie, Darrell; Song, Yang

doi:10.3386/w23680

Cited by 60 publications

(59 citation statements)

References 20 publications

(38 reference statements)

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“…When the amount of excess reserves in the system increases, the marginal funding 37 Dealers' funding value adjustment (FVA) may also act as a deterrent for arbitrage activity. As analysed in Andersen, Duffie, and Song (2017), this common practice among dealers ensures that a trade conducted by the swap desk is beneficial from the perspective of the bank's legacy shareholders.…”

Section: Basis Pointsmentioning

confidence: 99%

Segmented Money Markets and Covered Interest Parity Arbitrage

Rime

Schrimpf

Syrstad³

2017

SSRN Journal

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Section: Basis Pointsmentioning

confidence: 99%

Segmented Money Markets and Covered Interest Parity Arbitrage

Rime

Schrimpf

Syrstad³

2017

SSRN Journal

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“…If one can make a profit or suffer a loss by margin process, δ * = 0 may not be optimal. A debate is still underway whether funding spread should be recouped from counterparties and how to handle the accounting; see, e.g., [36,37,25,5,2]. Indeed, in frictionless markets, choices of funding are separated with pricing as MM theorem properly applies.…”

Section: Analysis Of the Full Margin Requirementmentioning

confidence: 99%

A Risk-Sharing Framework of Bilateral Contracts

Lee¹,

Sturm²,

Zhou³

2020

SIAM J. Finan. Math.

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We introduce a two-agent problem which is inspired by price asymmetry arising from funding difference. When two parties have different funding rates, the two parties deduce different fair prices for derivative contracts even under the same pricing methodology and parameters. Thus, the two parties should enter the derivative contracts with a negotiated price, and we call the negotiation a risk-sharing problem. This framework defines the negotiation as a problem that maximizes the sum of utilities of the two parties. By the derived optimal price, we provide a theoretical analysis on how the price is determined between the two parties. As well as the price, the risk-sharing framework produces an optimal amount of collateral. The derived optimal collateral can be used for contracts between financial firms and non-financial firms. However, inter-dealers markets are governed by regulations. As recommended in Basel III, it is a convention in inter-dealer contracts to pledge the full amount of a close-out price as collateral. In this case, using the optimal collateral, we interpret conditions for the full margin requirement to be indeed optimal.

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“…The intertwining between the FVA and EC metrics leads to a forward-backward stochastic differential equation (FBSDE) for the reserve capital and target reserve capital. By doing so, we also improve the FVA models in Albanese, Andersen, and Iabichino (2015) or Crépey and Song (2015) (see also Albanese and Andersen (2014) and Andersen, Duffie, and Song (2016)).…”

Section: Contents Of the Papermentioning

confidence: 99%

“…Having designed the XVA risk-adjustment methodology in the form of a KVA defined as cost of capital, the companion task is to specify a proper modeling framework for the loss process L to be used as input in these cost of capital computations. By doing so, we also improve the FVA models in or Crépey and Song (2015) (see also Albanese and Andersen (2014) and Andersen, Duffie, and Song (2016)).…”

Section: Reserve Capital and Target Reserve Capitalmentioning

confidence: 99%

Capital Valuation Adjustment and Funding Valuation Adjustment

Albanese

Caenazzo²,

Crépey

2016

SSRN Journal

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In the aftermath of the 2007 global financial crisis, banks started reflecting into derivative pricing the cost of capital and collateral funding through XVA metrics. Here XVA is a catch-all acronym whereby X is replaced by a letter such as C for credit, D for debt, F for funding, K for capital and so on, and VA stands for valuation adjustment.This behaviour is at odds with economies where markets for contingent claims are complete, whereby trades clear at fair valuations and the costs for capital and collateral are both irrelevant to investment decisions.In this paper, we set forth a mathematical formalism for derivative portfolio management in incomplete markets for banks. A particular emphasis is given to the problem of finding optimal strategies for retained earnings which ensure a sustainable dividend policy.

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Funding Value Adjustments

Cited by 60 publications

References 20 publications

Segmented Money Markets and Covered Interest Parity Arbitrage

Segmented Money Markets and Covered Interest Parity Arbitrage

A Risk-Sharing Framework of Bilateral Contracts

Capital Valuation Adjustment and Funding Valuation Adjustment

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