Funding Value Adjustments
Darrell Duffie and
No 23680, NBER Working Papers from National Bureau of Economic Research, Inc
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)
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Published as LEIF ANDERSEN & DARRELL DUFFIE & YANG SONG, 2019. "Funding Value Adjustments," The Journal of Finance, vol 74(1), pages 145-192.
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Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:23680
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