Pricing of Derivatives Contracts under Collateral Agreements: Liquidity and Funding Value Adjustments

30 Pages Posted: 19 Dec 2011 Last revised: 13 Jun 2013

Date Written: March 20, 2013

Abstract

We analyse the pricing of derivatives under a CSA agreement, without considering netting, minimum transfer amounts and thresholds. We come up with a decomposition of the total contract's value in a risk-free component, a liquidity value adjustment and a funding value adjustment. Implications for the organization of a dealing room are also investigated.

Keywords: collateral, CSA, liquidity value adjustment, LVA, funding value adjustment, FVA, derivatives, swap, FRA

JEL Classification: G12, G13

Suggested Citation

Castagna, Antonio, Pricing of Derivatives Contracts under Collateral Agreements: Liquidity and Funding Value Adjustments (March 20, 2013). Available at SSRN: https://ssrn.com/abstract=1974479 or http://dx.doi.org/10.2139/ssrn.1974479

Antonio Castagna (Contact Author)

Iason Ltd. ( email )

7th Floor, Hume House
Dublin, 4
Ireland

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