Company: Numerix LLC
Category: Credit Derivatives
Published: 14 May 2014
Overnight Index Swap (OIS) discounting and Funding Valuation Adjustment (FVA) have been hot topics in the Over-the-Counter (OTC) derivatives market since the global financial crisis. Today's market participants continue to see a large disparity in market quotes, leading us to take a deeper dive into the FVA relationship as part of the funding process-including how to incorporate a ‘funding charge' in pricing to reflect a firm's true cost of funding. Moreover, optionality embedded in Credit Support Annexes (CSAs) can make the pricing exercise even more complicated.
We will begin this paper with a discussion of the basics of OIS discounting and FVA for OTC derivatives-and then explore the relationship between the two concepts. We will also look at a case study that highlights the potential impact of FVA on trade profitability.