FVA accounting, risk management and collateral trading

Claudio Albanese, Leif Andersen and Stefano Iabichino provide a concise comparison of funding valuation adjustment/funding debt adjustment accounting with the funding cost adjustment/funding benefit adjustment method currently endorsed by several large banks. They discuss funds transfer pricing policies, risk management implications, and quantify the notion of funding arbitrage

Frustrated man at the blackboard during a maths class

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The notion of charging for ‘funding costs'became painfully relevant for banks as their borrowing spreads jumped up during the financial crisis. Drawing inspiration from work by Piterbarg (2010) and Burgard & Kjaer (2011, 2013), several banks recently instituted accounting changes aimed at capturing the funding costs for uncollateralised derivatives transactions. The prevalent funding cost adjustment/funding benefit adjustment (FCA/FBA) accounting method is simple but

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