In the previous two blogs we introduced FVA and described the ongoing industry debate on how to treat FVA, whether as a part of risk-neutral pricing or as an extra cost of a trade. Interest in this topic was recently renewed, particularly in light of the JPMorgan's (JPM) Q4 2013 earnings report on January 14th 2014, which for the first time included FVA.

Previously we introduced FVA - Funding Valuation Adjustment - and outlined different scenarios when it has to be calculated. We also demonstrated the role of wrong-way risk, including one arising from a correlation between the default risk of a bank and its counterparty. Here we describe the on-going industry debate on how to treat FVA — as a part of risk-neutral pricing or as an extra cost of a trade.

FVA is the latest significant innovation in measuring trade profitability and captures the impact of funding and liquidity on the cost of a trade. This cost depends on the nature of the CSA and the net collateral posted or received.

Description of AFD and its business activities The Agence Française de Développement (French Agency for Development – AFD) is a public development finance institution that has been working to fight poverty and foster economic growth in developing countries and the French Overseas Provinces for seventy years. It executes the policy defined by the French Government. […]

As cited by Chartis, buy-side firms are witnessing a rapidly changing operating environment and need to not only comply with regulations but also adapt to a new marketplace. Quantifi’s solution for buy-side analytics is an integrated Portfolio Management Systems (PMS) that delivers cross-asset trading, front-to-back operations, position management, market, credit, counterparty and liquidity risk management, […]

After the 2007 crisis, CCR was identified as one of the major cause of the turmoil in the financial market, and mostly materialised through downgrade and loss in value, more than actual defaults.

Recent years have seen valuation adjustments take centre stage in the pricing and valuation of OTC derivatives. Costs and benefits arising from credit (CVA), debt (DVA), funding (FVA) and collateral (ColVA) have become critically important in defining the dynamics of OTC markets. The newest - and perhaps most significant - member of the VA family is KVA (capital value adjustment).

What is your area of business and principal activities? Tiden Capital is a private investment company with over $100 million in assets under management. The firm is focused on relative value and corporate structured credit opportunities, including CDS and CDS index tranche products. At the time when you were looking at solutions, what was the […]

Senior practitioners from across the industry provide their views on the developments and key challenges facing the OTC derivatives market. Paul Lewitt, Former Global Head of Credit Trading, Lloyds Banking Group Prof. Moorad Choudhry, Department of Mathematical Sciences, Brunel University Dr. Mariam Harfush-Pardo, Market & Counterparty Risk Technical Specialist, Prudential Regulation Authority Jean-Roch Sibille, Head […]