Should Derivatives Dealers Make A Funding Value Adjustment?

By: John Hull, Alan White

Many derivatives dealers believe that they should incorporate their funding costs into the determination of the fair value of derivatives. The resulting change in the value of the derivative is known as a funding value adjustment (FVA). In this chapter we shall present a sequence of arguments to show that a funding value adjustment should not be made. The value of a derivatives transaction, or portfolio of derivatives transactions, does depend on the credit risk of the two sides, but it should n

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