Abstract

http://ssrn.com/abstract=2245821
 
 

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Valuing Derivatives: Funding Value Adjustments and Fair Value


John C. Hull


University of Toronto - Rotman School of Management

Alan White


University of Toronto - Rotman School of Management

March 2014

Financial Analysts Journal, Forthcoming
Rotman School of Management Working Paper No. 2245821

Abstract:     
The authors examine whether a bank should make a funding value adjustment (FVA) when valuing derivatives. They conclude that an FVA is justifiable only for the part of a company’s credit spread that does not reflect default risk. They show that an FVA can lead to conflicts between traders and accountants. The types of transactions a bank enters into with end users will depend on how high its funding costs are. Furthermore, an FVA can give rise to arbitrage opportunities for end users.

Number of Pages in PDF File: 27

Keywords: Derivatives, FVA, Fair Value

JEL Classification: G13, G21

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Date posted: April 7, 2013 ; Last revised: March 26, 2014

Suggested Citation

Hull, John C. and White, Alan, Valuing Derivatives: Funding Value Adjustments and Fair Value (March 2014). Financial Analysts Journal, Forthcoming; Rotman School of Management Working Paper No. 2245821. Available at SSRN: http://ssrn.com/abstract=2245821 or http://dx.doi.org/10.2139/ssrn.2245821

Contact Information

John C. Hull (Contact Author)
University of Toronto - Rotman School of Management ( email )
105 St. George Street
Toronto, Ontario M5S 3E6
Canada
(416) 978-8615 (Phone)
416-971-3048 (Fax)
Alan White
University of Toronto - Rotman School of Management ( email )
105 St. George Street
Toronto, Ontario M5S 3E6
Canada
416-978-3689 (Phone)
416-971-3048 (Fax)
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