 Binary funding impacts in derivative valuationJunbeom Lee and Chao Zhou Mathematical Finance, 2021, vol. 31, issue 1, 242-278 Abstract: We discuss the binary nature of funding impact in derivative valuation. Under some conditions, funding is either a cost or a benefit, that is, one of the lending/borrowing rates does not play a role in pricing derivatives. When derivatives are priced, considering different lending/borrowing rates leads to semilinear backward stochastic differential equations (BSDEs) and partial differential equation (PDEs), and thus it is necessary to solve the equations numerically. However, once it can be guaranteed that only one of the rates affects pricing, linear equations can be recovered, and analytical formulae can be derived. Moreover, as a by‐product, our results explain how debt value adjustment (DVA) and funding benefits are dissimilar. It is often believed that considering both DVA and funding benefits results in a double‐counting issue but it will be shown that the two components are affected by different mathematical structures of derivative transactions. We find that funding benefit is related to the decreasing property of the payoff function, but this relationship decreases as the funding choices of underlying assets are transferred to repo markets. Date: 2021 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:bla:mathfi:v:31:y:2021:i:1:p:242-278 Ordering information: This journal article can be ordered from Access Statistics for this article Mathematical Finance is currently edited by Jerome Detemple More articles in Mathematical Finance from Wiley Blackwell |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.