Funding Adjustments in Equity Linear Products

18 Pages Posted: 17 Jun 2019

See all articles by Stefania Gabrielli

Stefania Gabrielli

Be Consulting

Andrea Pallavicini

Banca IMI; Imperial College London - Department of Mathematics

Stefano Scoleri

Be Consulting

Date Written: June 6, 2019

Abstract

Valuation adjustments are nowadays a common practice to include credit and liquidity effects in option pricing. Funding costs arising from collateral procedures, hedging strategies and taxes are added to option prices to take into account the production cost of financial contracts so that a profitability analysis can be reliably assessed. In particular, when dealing with linear products, we need a precise evaluation of such contributions since bid-ask spreads may be very tight. In this paper we start from a general pricing framework inclusive of valuation adjustments to derive simple evaluation formulae for the relevant case of total return equity swaps when stock lending and borrowing is adopted as hedging strategy.

Keywords: Funding, Valuation Adjustments, FVA, Collateral, Equity Swap, Total Return Swap, Stock Lending, Dividend Tax, Tobin Tax

JEL Classification: G12, G13, G32

Suggested Citation

Gabrielli, Stefania and Pallavicini, Andrea and Scoleri, Stefano, Funding Adjustments in Equity Linear Products (June 6, 2019). Available at SSRN: https://ssrn.com/abstract=3400025 or http://dx.doi.org/10.2139/ssrn.3400025

Stefania Gabrielli

Be Consulting ( email )

Piazza Affari 2
Milano
Italy

Andrea Pallavicini

Banca IMI ( email )

Largo Mattioli 3
Milan, MI 20121
Italy
+39 02 7261 (Phone)

Imperial College London - Department of Mathematics ( email )

South Kensington Campus
London SW7 2AZ, SW7 2AZ
United Kingdom

Stefano Scoleri (Contact Author)

Be Consulting ( email )

Piazza Affari 2
Milano
Italy

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