Cutting Edge introduction: another FVA?

Including funding costs and benefits in derivatives prices is a controversial topic, closely tied up with the credit and debit valuation adjustments of counterparty risk. But new research suggests that, even with no default risk, differences in the levels at which a party can lend and borrow affect buy and sell prices, with complex effects on valuation. Laurie Carver introduces this month’s technical articles

Over the past few years, quants have been fighting about whether to include funding costs in derivatives prices, through a funding valuation adjustment (FVA) closely related to counterparty risk. For many, a starting point was an article published in the February 2010 issue of Risk, Funding beyond discounting: collateral agreements and derivatives pricing (Risk February 2010, pages 98–102) by Vladimir Piterbarg, global head of quantitative finance at Barclays in London. That article showed that