Regulatory-optimal funding

Funding costs, both for derivatives trading and for more traditional bank lending, are set by treasury functions, which now must consider regulatory requirements such as the Basel III liquidity coverage ratio. But few studies look at how to optimise this process. Chris Kenyon and Andrew Green minimise funding costs based on different models of yield curve dynamics, and show how to outperform hedged funding

Trading desks that require funding typically must pay above the risk-free rate. This has led some to add a funding valuation adjustment (FVA) to derivatives prices, and to a heated debate over the legitimacy of this practice (Hull & White 2012). Some firms are now starting to report explicit FVA line items. However, the FVA literature treats the funding curve as an input to the model (Burgard & Kjaer 2011; Morini & Prampolini 2011). This can vary from the firm's senior unsecured debt to