Pricing of Derivatives Contracts under Collateral Agreements: Liquidity and funding value adjustments
by Antonio Castagna of iason. Ltd.
March 20, 2013
Abstract: We analyse the pricing of derivatives under a CSA agreement, without considering netting, minimum transfer amounts and thresholds. We come up with a decomposition of the total contract's value in a risk-free component, a liquidity value adjustment and a funding value adjustment. Implications for the organization of a dealing room are also investigated.
Keywords: collateral, CSA, liquidity value adjustment, LVA, funding value adjustment, FVA, derivatives, swap, FRA.