Valuing Derivatives: Funding Value Adjustments and Fair Value

27 Pages Posted: 7 Apr 2013 Last revised: 26 Mar 2014

John C. Hull

University of Toronto - Rotman School of Management

Alan White

University of Toronto - Rotman School of Management

Date Written: March 2014

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.

Keywords: Derivatives, FVA, Fair Value

JEL Classification: G13, G21

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: https://ssrn.com/abstract=2245821 or http://dx.doi.org/10.2139/ssrn.2245821

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)

Paper statistics

Downloads
2,204
Rank
4,585
Abstract Views
7,783