C. Burgard, M. Kjaer. Funding Costs, Funding Strategies, Risk, 82-87, Dec 2013.
17 Pages Posted: 22 Mar 2012 Last revised: 15 Jan 2015
Date Written: 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).
Keywords: Counterparty risk, CVA, FVA, Funding, Collateral, PDE, Feynman-Kac theorem
JEL Classification: G13
Suggested Citation: Suggested Citation
Burgard, Christoph and Kjaer, Mats, Funding Costs, Funding Strategies (December 6, 2012). C. Burgard, M. Kjaer. Funding Costs, Funding Strategies, Risk, 82-87, Dec 2013.. Available at SSRN: https://ssrn.com/abstract=2027195 or http://dx.doi.org/10.2139/ssrn.2027195
By Andrew Ang