Deciphering FVA: Understanding, Modeling and Using Funding Value Adjustment

While Credit Value Adjustment (CVA) and Debit Value Adjustment (DVA) are relatively well understood by both quants and practitioners in the derivatives markets, the concept of Funding Value Adjustment (FVA) remains the subject of much active discussion.

On July 24, 2012 Dr. Alexander Sokol of CompatibL discussed FVA and its role in derivative valuations, trading, and liquidity management.

In the first part of the webinar, Dr. Sokol discussed the role of FVA in making OIS valuations consistent with real-life Credit Support Annexes (CSAs) which have thresholds and minimum transfer amounts (MTA) as well as curve selection for the funding cost (FCA) and funding benefit (FBA) adjustments. This section also discussed wrong way risk in FVA – the correlation of funding requirements included in FVA with funding costs.

The second part of the webinar focused on the role of FVA in CVA/DVA modeling where FVA captures the funding cost or benefit of collateral choices which also affect CVA/DVA. This is especially important for Central Counterparties (CCPs) where the absence of CVA is offset by the increased funding cost for overcollateralization required by central clearing.

Dr. Sokol covered the following key topics:

  • FVA and OIS valuation in the presence of CSA thresholds and MTAs
  • The role of FVA in cost/benefit analysis of switching to central clearing
  • Selecting the FCA and FBA curves
  • FVA and liquidity management
  • Wrong way risk in FVA

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