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Funding, Liquidity, Credit and Counterparty Risk: Links and implications

by Antonio Castagna of iason Ltd.

July 28, 2011

Abstract: In this work we try and clarify what is the essence of the dva: we believe we offer a robust conceptual framework to consistently included the dva in the balance sheet of a financial institutions. Under this perspective, to our knowledge never proposed before, the dva does not manifest any counterintuitive effects, such as a reduction of the current value of the liabilities of a counterparty when its creditworthiness worsens. On the other hand, the link between funding costs and dva will be easily identified and considered, and in this way we can also establish in a thorough fashion how to discount positive and negative future cash-flows.

JEL Classification: G13.

Keywords: counterparty risk, CVA, DVA, funding, liquidity.

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