Funding Value Adjustments

71 Pages Posted: 21 Aug 2017

See all articles by Leif B. G. Andersen

Leif B. G. Andersen

Bank of America Merrill Lynch

Darrell Duffie

Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER)

Yang Song

University of Washington - Michael G. Foster School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: August 2017

Abstract

We demonstrate that the funding value adjustments (FVAs) of major dealers are debt-overhang costs to their shareholders. In order to maximize shareholder value, dealer quotations therefore adjust for FVAs. Our case examples include interest-rate swap FVAs and violations of covered interest parity. Contrary to current valuation practice, FVAs are not themselves components of the market values of the positions being financed. Current dealer practice does, however, align incentives between trading desks and shareholders. We also establish a pecking order for preferred asset financing strategies and provide a new interpretation of the standard debit value adjustment (DVA).

Suggested Citation

Andersen, Leif B.G. and Duffie, James Darrell and Song, Yang, Funding Value Adjustments (August 2017). NBER Working Paper No. w23680. Available at SSRN: https://ssrn.com/abstract=3023055

Leif B.G. Andersen (Contact Author)

Bank of America Merrill Lynch ( email )

One Bryant Park
New York, NY 10036
United States
646-855-1835 (Phone)

James Darrell Duffie

Stanford University - Graduate School of Business ( email )

655 Knight Way
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Stanford, CA 94305-7298
United States
650-723-1976 (Phone)
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National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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Yang Song

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

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