Funding Value Adjustment (FVA)

by Shahram Alavian of Royal Bank of Scotland

October 29, 2011

Abstract: This paper reviews the concept of fair valuation in relation to adjustments that could arise due to counterparty default risk and funding needs. It is shown that the cost of funding from the market does not play any role in the fair valuation of the firm's OTC portfolios. Its main role is to offset the market-facing credit benefit (DVA). Therefore, adjusting the OTC trades using modied discount curves which incorporates the firm's nancing cost is inaccurate.

Keywords: FVA, CVA, DVA, Funding Cost.

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