Generalised CVA with Funding and Collateral via Semi-Replication
Barclays Investment Bank
December 6, 2012
The economic value of derivatives depends on the funding costs encountered by the issuer. In this paper we derive general relations between the costs of running specific funding strategies while the issuer is alive and the resulting windfalls or shortfalls upon the issuer default. This gives rise to generalisations to the classical bilateral CVA adjustment that include the cost of running specific funding strategies and sets the stage to discuss ways to mitigate these effects. We give practical examples of different funding strategies and their resulting funding cost (FCA) and funding value adjustments (FVA).
Number of Pages in PDF File: 17
Keywords: Counterparty risk, CVA, FVA, Funding, Collateral, PDE, Feynman-Kac theorem
JEL Classification: G13working papers series
Date posted: March 22, 2012 ; Last revised: August 20, 2013
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