27 Pages Posted: 7 Apr 2013 Last revised: 7 Sep 2017
Date Written: March 1, 2014
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: Suggested Citation
Hull, John C. and White, Alan, Valuing Derivatives: Funding Value Adjustments and Fair Value (March 1, 2014). Financial Analysts Journal, volume 70, no.3 (May/June 2014); 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