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Pricing Swaps Including Funding Costs

by Antonio Castagna of iason Ltd.

July 28, 2011

Abstract: In this paper we study how to include funding costs into the pricing of interest rate swaps and we show how they affect the value of the swap via a Funding Value Adjustment (FVA), in analogy with the Credit Value Adjustment (CVA) and the DVA. We consider the pricing of swap contracts with no collateral agreement or any other form of credit risk mitigations.

JEL Classification: G13.

Keywords: funding, liquidity, dva, credit spread, funding value adjustment, FVA

Download paper (243K PDF) 19 pages