Credit Value Adjustment and Funding Value Adjustment All Together

Abstract

Credit value adjustment (CVA) and funding value adjustment (FVA) to the derivative contracts have been demonstrated to be important in the credit crisis after Lehman Brothers crash. Accurate valuations of CVA and FVA are essential to reflect the economic values of credit and funding risks. In the present article, we reviewed the concepts leading to definition of funding value adjustment, and discussed various implications due to the existence of CVA and FVA. We argue that FVA is consistent with the replication economics and DVA should not be used. The FVA asymmetry, the impact on no-arbitrage condition and trading competition are discussed. The general model for derivative pricing in the presence of CVA/FVA is also derived. Cross currency collateral posting and option on collateral selection is touched briefly.

Keywords: CVA, FVA, Derivative Valuation

JEL Classification: G12