CVA and FVA with liability-side pricing

Central to the funding valuation adjustment (FVA) debate is the law of one price. Wujiang Lou finds the fair funding rate for an uncollateralised derivative’s fair value is the liability side’s rate. He presents a liability-side derivatives pricing theory, and a new definition of credit valuation adjustment and FVA conforming to the law

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Banks are moving ahead with funding valuation adjustment (FVA), although it is far from a settled issue among academic researchers, accountants, quants, traders and regulatory stakeholders. Indeed, the complexity surrounding FVA has only increased as discussions have deepened. KPMG (2013), for example, highlights nine propositions for understanding and implementing FVA. While discussion is dominated by the accounting definition of fair value, the International Swaps