Risky Funding: A Unified Framework for Counterparty and Liquidity Charges

15 Pages Posted: 2 Sep 2010

See all articles by Massimo Morini

Massimo Morini

Algorand Foundation; Bocconi University

Andrea Prampolini

Intesa SanPaolo SpA; Polytechnic University of Milan

Date Written: August 30, 2010

Abstract

Standard techniques for incorporating liquidity costs into the fair value of derivatives produce counter-intuitive results when credit risk of the counterparty (CVA) and of the investor (DVA) are added to the picture. Here, Massimo Morini and Andrea Prampolini show that a consistent framework can only be achieved by giving an explicit representation to the funding strategy, including associated default risks.

Keywords: funding, liquidity, counterparty risk, DVA, CVA, basis

JEL Classification: G13

Suggested Citation

Morini, Massimo and Prampolini, Andrea, Risky Funding: A Unified Framework for Counterparty and Liquidity Charges (August 30, 2010). Available at SSRN: https://ssrn.com/abstract=1669930 or http://dx.doi.org/10.2139/ssrn.1669930

Massimo Morini (Contact Author)

Algorand Foundation ( email )

1 George Street
049145
Singapore
20144 (Fax)

Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136
Italy

Andrea Prampolini

Intesa SanPaolo SpA ( email )

Piazza P. Ferrari 10
P.O. BOX 8319
Milan, 20121
Italy

Polytechnic University of Milan ( email )

Piazza Leonardo da Vinci
Milan, Milano 20100
Italy

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