Funding Value Adjustments

Darrell Duffie, Leif Andersen and Yang Song
Additional contact information
Leif Andersen: Bank of America Merrill Lynch
Yang Song: Stanford University

Research Papers from Stanford University, Graduate School of Business

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).

JEL-codes: G12 G23 G24 G32 (search for similar items in EconPapers)
Date: 2018-03
New Economics Papers: this item is included in nep-cfn
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Funding Value Adjustments (2019)
Working Paper: Funding Value Adjustments (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:stabus:3571

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