Funding Value Adjustments

Leif Andersen, Darrell Duffie and Yang Song

Journal of Finance, 2019, vol. 74, issue 1, 145-192

Abstract: In this paper, we demonstrate that the funding value adjustments (FVAs) of major dealers are debt overhang costs to their shareholders. To maximize shareholder value, dealer quotations therefore adjust for FVAs. Our case studies 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.

Date: 2019
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Citations: View citations in EconPapers (75)

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https://doi.org/10.1111/jofi.12739

Related works:
Working Paper: Funding Value Adjustments (2018)
Working Paper: Funding Value Adjustments (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:bla:jfinan:v:74:y:2019:i:1:p:145-192

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