Deciphering FVA: Understanding, Modeling and Using Funding Value Adjustment
While Credit Value Adjustment (CVA) and Debit Value Adjustment (DVA) are relatively well understood by both quants and practitioners in the derivatives markets, the concept of Funding Value Adjustment (FVA) remains the subject of much active discussion.
On July 24, 2012 Dr. Alexander Sokol of CompatibL discussed FVA and its role in derivative valuations, trading, and liquidity management.
In the first part of the webinar, Dr. Sokol discussed the role of FVA in making OIS valuations consistent with real-life Credit Support Annexes (CSAs) which have thresholds and minimum transfer amounts (MTA) as well as curve selection for the funding cost (FCA) and funding benefit (FBA) adjustments. This section also discussed wrong way risk in FVA – the correlation of funding requirements included in FVA with funding costs.
The second part of the webinar focused on the role of FVA in CVA/DVA modeling where FVA captures the funding cost or benefit of collateral choices which also affect CVA/DVA. This is especially important for Central Counterparties (CCPs) where the absence of CVA is offset by the increased funding cost for overcollateralization required by central clearing.
Dr. Sokol covered the following key topics:
- FVA and OIS valuation in the presence of CSA thresholds and MTAs
- The role of FVA in cost/benefit analysis of switching to central clearing
- Selecting the FCA and FBA curves
- FVA and liquidity management
- Wrong way risk in FVA
Featured Speakers
Dr. Alexander Sokol
Alexander Sokol is a founder of Numerix, a leading derivatives and risk analytics vendor, and CompatibL, a Numerix implementation and custom development partner. Alexander’s research interests include CVA and wrong way risk modeling. He is the author of “A Practical Guide to Monte Carlo CVA”, published in “Lessons from the Financial Crisis” edited by Arthur M. Berd (Risk Books, 2010). Alexander holds a PhD from the Landau Institute for Theoretical Physics.
As Chief Marketing Officer and Executive Vice President of Global Marketing & Corporate Communications, James leads the company’s global marketing and corporate communications efforts, spanning a diverse set of solutions and audiences. He oversees integrated marketing communications to clients in the largest global financial markets and to the Numerix partner network through the company's branding, electronic marketing, research, events, public relations, advertising and relationship marketing.
Since joining Numerix in 2008, James has launched the organization’s award-winning thought leadership program, bringing to light challenges and insights from Numerix market experts. He also hosts the Numerix Video Blog, tackling the challenges pressing the derivatives markets—from regulatory issues to trading strategies.
Prior to joining Numerix, James served as Managing Director of Global Marketing and Communications for Fitch Ratings. During his tenure at Fitch, he built the firm’s public relations program, oversaw investor relations and led marketing and communications plans for several acquisitions. Prior to Fitch, James was a member of the communications team at Moody's Investors Service.
