Funding value adjustment in OTC derivatives market : a quantitative study

This thesis analyzes the funding issue in the general context of counterparty risk and xVA (adjustments to derivative contracts’ theoretical value to account for a series of risks deemed negligible before the crisis). In particular, the Funding Value Adjustment (FVA) measures the economic effects of collateral exchanges, a common counterparty risk mitigation practice. Over the past five years in literature a lot of debate has emerged on the issue, fueled by the contributions of academics and practitioners. To calculate this adjustment several methods have been proposed over the years, from the simple to the most complex ones. In particular, in this work, quantitative analysis are conducted on the basis of two different approaches: a more simple and immediate one, which considers the FVA as a building blocks component of a pricing framework where adjustments are additive, and the other, more complex and elaborated, which considers the FVA as a price component possible to determine only following a recursive way, being interdependent with the price of the instrument itself. Those quantitative analysis have two goals: on one hand to evaluate the error one commits in following the first approach, on the other hand determine whether such an adjustment could be assessed instrument-wise, or has to be calculated at bank-level, considering insofar the possibility to offset funding-related costs and benefits.