Risk 25: The FVA debate
Derivatives pricing practices have been overhauled in recent years, with banks becoming more conscious about funding costs. But should dealers take funding valuation adjustment into account when valuing derivatives and making trading decisions? John Hull and Alan White argue they should not
When valuing European options in the early 1970s, Fischer Black, Myron Scholes and Robert Merton (BSM) showed that, over any short period of time, an investment in an option could be replicated with a portfolio of stock and risk-free debt. This observation allowed them to calculate the economic value of the option by solving a differential equation. Subsequent analysis showed the economic value of the option could also be determined by discounting the expected pay-off on the option in a risk
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Printing this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-digital.com/terms-and-conditions/subscriptions/
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Copying this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-digital.com/terms-and-conditions/subscriptions/
If you would like to purchase additional rights please email info@risk.net
More on Markets
Franklin Templeton steps back into FX options
Former biggest user of the instrument among US mutual funds returns with $7.6bn of USD/JPY strategies
CME launches term SOFR curve as clearing talks ebb
Give-and-get pricing tool addresses pressing transparency need in $2.5 trillion swaps market
Capital Group grows interest rates swaps book by 62%
Counterparty Radar: Aggregate notional of US mutual fund and ETF positions hit $957 billion in Q1
Corporates look to collars amid rates uncertainty
Selling the floor can cover majority of cap’s premium
Fee compression threatens FX algo innovation
e-FX Forum: Bank algo heads say continued revenue pressures could stifle development
FX options’ MDP migration
Volumes on multi-dealer platforms are climbing, but dealers warn pricing may not be optimal
Collapse of correlation fails to stem zeal for dispersion
New analysis suggests immensely popular relative value strategy may have more upside
BofA extends ‘guaranteed rate’ window to a year
US bank holds spot FX rates for longer period to give alternative hedging tools to smaller clients