Risky Funding: A Unified Framework for Counterparty and Liquidity Charges
15 Pages Posted: 2 Sep 2010
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: Suggested Citation
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